Advance Tax is simply your tax liability calculated in advance. If your tax liability in a year is more than Rs 10,000 the IT department wants you to pay tax on your income at regular intervals, instead of a lump sum payment. You should pay 100% of your tax liability by 15th March.
To be able to pay 100% of your tax by 15th March, you must estimate your income for the whole year and calculate & pay tax on it.
Usually salaried individuals do not need to worry about paying any advance tax. Your employer is already deducting TDS on your salary and depositing it with the government. However, if you have income which can trigger a shortfall in the taxes deposited against your PAN, you must pay advance tax. This shortfall may arise due to tax payable by you on interest income earned. Interest Income from fixed deposits is fully taxable, while on interest income from savings account a deduction of up to Rs 10,000 is allowed under section 80TTA and remaining is taxable. If you did not report your Rental Income to your employer, and tax is payable on it, this could also lead to a shortfall of tax deposited by you.
In case of Freelancers, where TDS may not have been deducted or where TDS deducted is not sufficient to meet their tax liability, payment of advance tax is very relevant. In all likelihood, freelancers will have tax liability outstanding when they estimate their taxes and they must pay 100% of this before 15th March.
So calculate your tax dues for your total income and make sure you have paid at least 90% of your tax dues before 31st March. If you are not able to deposit 90% of your taxes by 31st March, you’ll have to pay interest under section 234B which will be 1% simple interest calculated from 1st April till the time you pay the total outstanding amount. Additionally, since Advance Tax is supposed to be paid at regular intervals, in installments, your failure to do so shall also attract interest under section 234C based on the shortfall in payments.
Here is a simple guide you can use to pay Advance Tax. Note that you don’t need to submit any income details or supporting documents along with this payment of Advance Tax. No paperwork is required; you only need to pay the amount which is due.
In case you find out later than you have estimated and deposited more tax than you were supposed to – the excess paid shall be refunded to you by the Income Tax Department. Interest @ 6% per annum is also paid by the Income Tax department on the excess amount deposited, if this amount is more than 10% of your tax liability.
Reach out to us, if you need help with estimating your advance tax liability and paying it on time.