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Essential Steps for Making Advance Tax Payments
- Everything You Need To Know -
Step 1 - Understanding Advance Tax
Typically, taxpayers pay income tax after the end of the financial year. However, if the tax payable exceeds ₹10,000 in a financial year, advance tax must be paid in installments as per the due dates throughout the year. Paying in advance helps reduce the burden of a lump sum payment at the end of the year.
Step 2 - Exemptions from Advance Tax
Taxpayers opting for presumptive taxation, such as small businesses that pay tax as a percentage of turnover (instead of actual profits), are exempt from advance tax. This applies to Individual, HUF, or firms under certain conditions, usually for businesses with limited turnover. It’s a simplified tax system designed to reduce compliance burdens for smaller businesses.
Step 3 - Penalties for Late Payment
Advance tax payments must be made on time, as per the prescribed due dates. Late payments attract an interest charge of 1% per month (or part of a month) on the overdue amount. The penalty can accumulate quickly, adding to the overall tax liability if not paid promptly.
Step 4 - Who Must Pay Advance Tax
Any taxpayer – whether salaried, freelance, or running a business (including proprietorships, firms, LLPs, or companies) – must pay advance tax if their total tax liability exceeds ₹10,000 for the financial year. The requirement is irrespective of whether you receive income regularly or in a lump sum.
Step 5 - Presumptive Taxation Explained
Under presumptive taxation, eligible taxpayers pay tax on a fixed percentage (8%) of their turnover instead of actual profits. This scheme is available for individuals, HUFs, and partnership firms, with turnover limits of ₹2 crore for traders and ₹50 lakh for professionals. It's an easy and efficient way to calculate taxes without complex accounting.
Step 6 - Consequences of Deferred Advance Tax
Advance tax is mandatory when the tax payable exceeds ₹10,000. Failing to make timely payments leads to penalties, and taxpayers must estimate and pay their taxes throughout the year to avoid legal consequences. Procrastination can lead to a higher overall liability due to accumulated interest and penalties.
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