How to Calculate Advance Tax and Avoid Penalties in India

To run the country smoothly, the government needs a steady flow of revenue throughout the year. Since income tax is a major source of this revenue, relying on tax payments at the end of the financial year can create gaps and problems for them. To address this, the government introduced the advance tax payment system to ensure that individuals and businesses pay taxes as they earn. 

According to this system, those with tax liability above a certain threshold must pay advance tax in installments over the year. This also helps taxpayers distribute a large burden at the end of the year as they can pay taxes in smaller, manageable amounts over time, just like an EMI.

Understanding Advance Tax Payments

So, what is advance tax? Simply put, it is the tax you pay before the financial year ends, instead of waiting until the end of the year to clear all your dues. It is also known as the ‘pay-as-you-earn’ scheme because you pay taxes in installments based on your estimated income throughout the year. 

If your total tax liability exceeds Rs. 10,000 in a financial year (after adjusting for TDS), you are required to pay advance tax in 4 installments, on or before 15th June, 15th September, 15th December, and 15th March. Since taxpayers can be penalised for inaccurate payments or delays, many people prefer reaching out to a financial consultant for stress-free filing.

Who Needs to Pay Advance Tax?

Any business or individual whose estimated tax liability in a given financial year exceeds Rs. 10,000 must pay advance tax. This includes:

1. Salaried individuals with income beyond salary

If your primary source of income is salary, your employer already deducts TDS at the appropriate slab rates, which means you do not need to make an advance income tax payment on salary. You may notice that this TDS provision does the exact thing as advance tax – it maintains a continuous flow of tax revenue for the government. 

However, if you have other sources of income, such as from rent, capital gains, interest from FDs, dividends, and lottery winnings, and the TDS deducted does not cover your total tax liability, you must pay advance tax.

2. Freelancers and self-employed professionals

Individuals earning a professional income such as consultants, lawyers, doctors, and writers, must estimate their annual earnings and pay advance tax in 4 installments. Since the appropriate TDS may not be deducted from such earnings, you are responsible for fulfilling your tax obligations. For example, your employer may only deduct a 10% TDS on your freelance income. However, if you fall under the 20% tax slab, you’ll still need to pay the remaining 10% as advance tax to avoid interest or penalties. Talking to a tax saving consultant in such cases can be quite helpful.

Under Section 44ADA, professionals can opt for the presumptive taxation scheme and pay their advance tax liability in one installment before 31st March.

3. Businesses

All businesses are required to pay advance tax in 4 installments if their expected tax liability crosses Rs. 10,000 in a financial year. Those opting for the presumptive taxation scheme under Section 44AD can pay their entire advance tax in a single installment by 31st March instead of four.

4. Non-residents

If you are an NRI and earn an income from any taxable Indian sources like rent, FD interest, or capital gains exceeding Rs. 10,000 after TDS in a financial year, you must pay advance tax before the advance tax due dates.

5. Exemptions

• Senior citizens who do not earn income from a business or profession are exempt from paying advance tax, even if their total taxable income exceeds Rs. 10,000.
• If employers deduct sufficient TDS from your salary and cover your total tax liability, you do not need to pay advance tax separately.
• If the TDS deducted by banks, employers, mutual fund houses, and tenants from various sources of income (salary, rental, fixed deposits, interest, etc.) is sufficient to cover your total tax liability, you need not make an income tax advance tax payment.

Advance Tax Payment Dates and Due Dates 

Given below are the advance tax payment dates established by the government. Missing them can result in penalties under Sections 234B and 234C of the Income Tax Act.

Individuals and companies who have opted for the presumptive taxation scheme can simply make their advance tax payments in a single installment by 31st March. For the rest, the government has set clear advance tax due dates, unlike TDS payment last date, which is generally the 7th of the following month.

Advance Tax Payment Online

Payments can be made physically at designated bank branches, but you can also conveniently make income tax advance tax payments online through the IT Department’s tax portal, via net banking, debit cards, or even UPI. If you’re wondering how to pay advance tax online, you can find the step-by-step walkthrough near the end of this article!

How to Calculate Advance Tax

Calculating exactly how much advance tax is owed can be tricky as it requires you to make a reasonable estimate of your earnings and tax liability for the year. One may wonder how to pay advance tax so early in June when the entire year’s income is uncertain. Thankfully, since there are 4 installments, you can make adjustments in the later quarters based on your actual earnings. 

If your income increases, you can pay the extra tax in the next installment to avoid penalties. On the other hand, if your earnings are lower than what you initially expected, your remaining payments can be decreased accordingly.

Here’s how you can calculate advance tax:

1. Estimate how much you’ll earn in the financial year

To make an accurate estimate of your tax liability, you need to take into account every source of your income. This includes salary, business income, interest, dividends, rental income, professional income, capital gains from investments, and any other taxable income.

2. Old regime considerations

If you plan on filing your taxes under the old tax regime, subtract any deductions you may be eligible for. Some examples are

• Section 80C deductions up to Rs. 1.5 lakh per year for investing in ULIPs, ELSS, PPF, SCSS, and more.
• Section 80D deductions for payments towards health insurance premiums for yourself and your loved ones.
• Section 80E deductions on interest payments for education loans.
• Section 24(b) deductions on interest paid on home loans.

Subtracting these deductions and exemptions should give you the gross taxable income on which you can calculate your tax liability for the year.

3. Determine tax owed based on income tax slabs

Use an income or advance tax calculator with the latest slab rates to get a reliable estimate of tax owed. These calculators also account for cess and surcharge which can be easily missed when calculating manually. A wealth planner can help you with this step and also guide you to optimize your tax liability by taking advantage of deductions, exemptions, and investment options. They ensure not only that you save as much tax as you legally can but also build long-term wealth through personalised investment and tax plans.

4. Subtract tax deducted at source

TDS already deducted, or you expect will be deducted, can be subtracted to arrive at your net tax liability. You can also subtract any eligible relief like under Section 87A to determine the amount of tax owed. If this figure is above Rs. 10,000, you must pay advance tax before the specified due dates and if the TDS paid exceeds your expected tax liability, you need not pay any tax in advance.

How to Calculate Advance Tax Payments – An Example

Suppose Raj estimates his professional income after subtracting TDS and deductions for the financial year would be Rs. 26 lakh. According to the new regime, this income would fall in the highest tax slab, 30%. This means, his total tax liability (cess added) would be around Rs. 5 lakh. Assuming he hasn’t opted for the presumptive taxation scheme, here’s how he can make his advance tax payment in 4 installments:

installment 1: Payment due on or before 15th June

15% of Rs. 5 lakh = Rs. 75,000

installment 2: Payment due on or before 15th September

45% of Rs. 5 lakh = Rs. 2,25,000. Since Raj already paid Rs. 75,000 in the first installment, he can subtract it from this one. So his second advance tax payment would be Rs. 2,25,000 – Rs. 75,000 = Rs. 1,50,000

installment 3: Payment due on or before 15th December

75% of Rs. 5 lakh = Rs. 3,75,000. Just like before, we’ll subtract the first and second installment amounts, meaning his third payment would be Rs.  Rs. 1,50,000. By 15th December, Raj will have cleared 3/4th of his tax liability.

installment 4: Payment due on or before 15th March

Tax left = Rs. 5,00,000 – Rs. 3,75,000 = Rs. 1,25,000

With these 4 payments, Raj avoids a large lump sum burden at the end of the financial year and the government can maintain a steady flow of revenue throughout the year.

Advance Tax Slabs and Rates

The advance tax rates are:

• 15% by 15th June
• 45% by 15th September
• 75% by 15th December
• 100% by 15th March

Remember this isn’t a separate tax. The advance tax percentage simply tells you the portion of your tax liability due before a specified date. Your liability is still calculated based on the old or new tax regime as there isn’t a separate advance tax slab.

Avoiding Penalties for Late Advance Tax Payments

It is important to note if the due dates for making advance income tax payments are missed, the Income Tax Department imposes interest on the due amount. If you miscalculate your expected income and pay less tax than required by the first due date, you will be charged a 1% interest per month on the remaining amount. This interest is applied under Section 234B and Section 234C of the Income Tax Act. 

The penalty will also apply if you miss the next payment deadline. Failing to pay the third or final installment, will result in a 1% simple interest being charged each month on the unpaid tax until the full amount is cleared. If you fail to pay at least 90% of the total tax before 31st March you’ll be charged 1% per month on the amount unpaid.

Step-by-Step Guide to Paying Advance Tax Online

One can make advance tax payment online by following these simple steps:

1. Visit the Income Tax Department’s official e-filing portal.
2. Look for the ‘e-Pay Tax’ option which can be found in the dropdown section under Quick Links.
3. You can also easily find it via the search bar.
4. You’ll be prompted to enter your PAN or TAN details and mobile number. Input them and press continue. Once you receive the OTP, enter it and press continue again.
5. On the new page, click on the ‘Income Tax’ tab and proceed.
6. Choose the assessment year. In the ‘type of payment’ box select ‘Advance Tax (100)’ and click on continue to proceed.
7. Here you’ll need to fill in a few details like tax, surcharge, cess, interest, and others. Fill them accurately and click continue.
8. Choose your preferred mode of payment from debit card, NEFT, RTGS, and net banking.
9. You will finally land on a summary page where you can review your details. Verify them and once you’re satisfied, press pay now.
10. That’s it! The next screen should show you an acknowledgement containing the BSR code and challan number. You should save a copy as you’re going to need it later at the end of the year when filing returns.

Conclusion

If your tax liability exceeds Rs. 10,000 you must pay advance tax in installments throughout the year. If you estimate your gross taxable income after subtracting TDS and relief exceeds this amount, you can make appropriate payments before the deadlines specified by the government. Delays and non-payment of advance tax can result in interest penalties.

Since a reasonable estimate of your tax liability is crucial, you should use a tax calculator 2024-25 updated with the latest income tax slab rates to determine it. You can use our free online tax calculator to ensure accuracy. The start of the financial year is a great time to begin tax planning as it gives you ample time to create tax-saving strategies. 
As the financial year 2025-26 approaches, why not give our experts a chance? Our investment planner will ensure you receive personalised tax-saving advice on investments, insurance, and loans. We also make sure you accurately and timely file your returns and comply with the latest tax regulations. Get in touch with our advisors today!