It refers to paying a part of your yearly taxes in advance.

Advance tax is the income tax payable if your tax liability exceeds Rs 10,000 in a financial year. Advance tax should be paid in the year in which the income is received. Hence, it is also known as the 'pay-as-you-earn' scheme. Advance tax is applicable when an individual has sources of income other than his/her salary. For instance, if one is earning through capital gains, interest on investments, lottery, house property or business, the concept becomes relevant. Any rebate due fetches you an interest of 0.5 per cent every month, or, six per cent annually, as in the case of an income tax refund. However, if you don't pay the advance tax on time, you'll be charged one per cent every month, or, 12 per cent a year. Who should file it? If you are salaried, you need not pay advance tax as your employer deducts tax at source (TDS). However, you still need to file it if you have other sources of income, increasing your liability to more than Rs 10,000. Professionals (self-employed) and businessmen will have to pay taxes in advance as, given their business income, the liability can be huge. The same goes for companies and corporates. When to file advance tax? Advance tax or self-assessment taxes have to be paid on the 15th of September, December and March, in instalments of 30 per cent, 30 per cent and 40 per cent, respectively, for noncorporates. Corporates need to pay it on the 15th of June, September, December and March. While employers deduct TDS on salaries, advance tax is paid on income that has not been subjected to TDS. How to file it? You can pay advance tax using the tax payment challan at the bank branches empanelled with the Income Tax (I-T) department. It can be deposited with the Reserve Bank of India, State Bank of India, ICICI Bank, HDFC Bank, Indian Overseas Bank, Indian Bank, and other authorised banks. There are 926 branches in India that can accept advance tax payments. You could also pay it online through the I-T department or the National Securities Depository site. Advance Tax:Details Jul 31 has just gone and we finished paying our self-assessment taxes for the last year. But the next deadline is round the corner. (These income tax guys will not let us sit in peace). The 15th Sep-the deadline to pay first installment of Advance tax. This article is all about Advance Tax for individuals. What is Advance Tax?

Advance tax, as the name implies, is the tax that one pays in advance. Advance tax is the income tax that is payable if your tax liability exceeds Rs 10,000 and should be paid in the same year in which income is received. It is also called as Pay as you Earn scheme, since you pay the tax in the same year in which you earn income.

Who pays Advance Tax?

The provisions of the Income Tax Act make it obligatory for every individual, self-employed professional, businessman and corporate to pay Advance Tax, on any income on which TDS(Tax deducted at Source) is not paid. Both individuals as well as corporates must pay this tax. For individuals, this is applied especially when (s)he has income other than income from salary. If individuals only income is his salary, then employer will deduct tax from his income and submit it. In such a case there is no cause for worry over advance tax payment. The tax deducted will be made available to the employee by employer in Form 16. But when there is income from other sources such as: interest gained (on saving bank account), capital gains, lottery wins, from house property or from business, then advance tax becomes relevant. If you estimate that you will owe more than Rs.10,000 on March 31 in taxes (after deducting TDS) then you should pay advance tax. Why Pay Advance Tax?

Advance tax is one of the major tools used by the Govt. to collect tax from the assesses all over India. This prepaid form of tax is designed in such a way that an assessee is made to pay tax to the Govt. in a Pay as You Earn Scheme. This mainly aims at reducing the last moment hassles to an assessee for payment of tax liability which may be because of either shortage of time or funds.

The aim of the Indian government behind setting up the advance tax system was to speed up the tax collection. This system also allowed the government to earn interest on the amount collected as tax, thus increasing funds to the government coffers. What if we do not Pay Advance Tax?

If you have to pay advance tax and If you fail to pay your Advance Tax or, if you pay less than the stipulated tax, you would be penalised and would have to pay extra under Sections 234A, 234B, 234C. So there is no escaping Tax. As Income Tax office says Pay Tax Karo Relax

The interest is calculated at 1% simple interest per month on the defaulted amount for three months. The interest penalty would continue up to the next deadline. If even after the last deadline of 15 March, the tax is not paid, then the 1% would be on the defaulted amount for a month, until the tax is fully paid.

How is it Calculated?

Advance tax is computed on income that an individual might earn during the year, in that sense it is estimated income. The tax is calculated using the rates applicable for the financial year.

Suppose after paying your first installment of tax on the estimated income, you actual income increased due to some shares/mutual funds you sold, You will need to revise your income and accordingly pay the differential in the next installment.

Advance tax dates and tax payable

Below are the dates and percentages of when the advance tax is to be paid :

For example, suppose your total tax liability(after deducting TDS) for this year is Rs 1,00,000/-. So by 15th September you will need to pay 30% which comes to Rs 30,000/-. By 15th December you will have to cover 60%, so you will need to pay another Rs 30,000/-. By 15th March, 100% of advance tax comes to Rs 100,000/, you will need to pay another Rs 40,000/-.

How to pay advance Tax?

Advance Tax can be paid by filing a Tax Payment Challan,ITNS 280.Challan, at designated branches of banks empanelled with the Income Tax Department. Branches of ICICI, HDFC and SBI accept Advance Tax Payment Challans. Alternatively, individuals could pay Advance Tax online through the Income Tax Dept / NSDL website. More on this later.

Penalty on not paying/paying less Advance Tax:Sections 234A, 234B and 234C.

If you owe more than Rs.10,000(after deducting TDS) while filing your returns, you will be penalized with Interest under sections 234A , 234 B & 234 C Under section 234A, the liability arises only when the return is filed after the due date which is 31st of July. Ex: Due Date for current year, which is Assessment Year 2012-2013 or Financial Year 2011-2012 is 31st July 2012.

Under section 234B, penalty arises when the total amount of advance tax paid along with the amount of TDS is less than 90% of the total tax liability. In such case interest is calculated at 1% per month of the amount of shortfall for time period from April to the month in which the return is filed. Under Section 234C, there are three components. For the first installment, the shortfall penalty is calculated for 3 months @1% p.m. Similarly, in the second installment, the shortfall penalty is also calculated for 3 months @1% p.m and the final installment is calculated at a flat rate if 1% for 1 month only.

Finotax has great Advance tax calculators. Check it out here. Lets look at these sections in detail. Interest under section 234 C

234 C will be applicable if you dont pay your advance taxes in regular installments. As per the Income Tax Act, youre suppose to pay 30% of your advance tax by 15th Sep, 60% by 15th December and 100% by 15th March. Lets see it through some examples.

Rahul has estimated his total tax payable as Rs.1,00,000 for this financial year. Lets see how 234 C will work if he didnt pay anything.

Interest under section 234 B

234 B will be applicable when total advance tax paid is less than 90 % Tax Payable. This will be charged at 1% per month till you pay your remaining taxes. Lets work it out through an Example:

Rajan has estimated his total taxes payable as Rs.1,00,000 and he has paid 50,000 as advance Tax till March 31st 2012. He pays the balance in July while filing his income tax return. Lets see how 234 B will be applied to him

If you pay our taxes in between April July period then interest @1% will be applied only on the balance tax payable .

Lets illustrate this with another example. Lets say you are an individual taxpayer and are liable to pay Rs 10,000 by way of advance tax. Suppose you pay Rs 9,500 in three instalments (Rs 3,000 on September 14, Rs 2,000 on December 15, and Rs 4,500 on March 15), would you have kept to your payment schedule? There will have been be no default in respect of the first instalment (Rs 3,000, which is 30 per cent of Rs 10,000). The second installment amount should, however, have been Rs 3,000 (60 per cent of Rs 10,000, less Rs 3,000 paid in the first instalment). Hence, the shortfall is Rs 1,000, on which the interest payable is Rs 30 (1 per cent of Rs 1,000 for three months). Since the third installment is Rs 4,500, there will have been a shortfall of Rs 500, on which the interest charged would be Rs 5 (1 per cent of Rs 500 for a month). Thus, you end up with a penal interest of Rs 35 for the year. If in the last month, that is March, you delay payment of the last instalment by even a day, you will have to pay interest on the entire balance of Rs 5,000.It is suggested that the best strategy for paying advance tax should be to pay a little extra for first 2 installments and then paying amount close to the total tax liability during the third installment. One should also try not to pay extra amount so as to avoid any hassles of refund as is it best to pay nominal interest amount later on. Paying Advance Tax

As mentioned earlier Advance Tax can be paid by filing a Tax Payment Challan, ITNS 280 Challan, at designated branches of banks empanelled with the Income Tax Department or through the Income Tax Dept / NSDL website.

ITNS 280 Challan:

One can download ITNS 280 Challan from here. Fill it up and pay at the at designated branches of banks empanelled with the Income Tax Department. If you need help in how to fill challan one can see the slide show at incometaxindiapr.gov.in. This is relevant but old so please fill the correct assessment year.