Advance Tax — Who Pays and When

What is Advance Tax?

Advance tax is income tax paid during the financial year in which the income is earned, instead of at the end of the year when you file your ITR. The principle: pay tax as you earn — the government doesn't wait 15 months for your money.

Section 208 of the Income Tax Act mandates advance tax if your total tax liability for the year (after TDS) is ₹10,000 or more.

Who Must Pay Advance Tax?

• Self-employed — proprietors, freelancers, professionals.
• Businesses — companies, LLPs, partnership firms.
• Salaried employees with significant additional income (rental, capital gains, FD interest, freelance).
• Anyone whose tax liability after TDS is ≥ ₹10,000.

Who is exempt?

• Senior citizens (60+) who do NOT have business or professional income. (A retired person earning only pension + FD interest is exempt.)
• Anyone whose total tax liability after TDS is < ₹10,000.

The Quarterly Schedule

How to Calculate Advance Tax

Step-by-step

1. Estimate annual income from all sources — business profit, salary, rent, interest, capital gains.
2. Deduct expenses & deductions — business expenses (or use 44AD %), 80C/80D etc.
3. Apply slab rates to arrive at gross tax liability.
4. Add health & education cess (4%) and surcharge (if income > ₹50 lakh).
5. Subtract TDS already deducted by clients/employer.
6. Subtract advance tax already paid in previous instalments.
7. The balance × cumulative % is the next instalment amount.

A Complete Worked Example

Vikram runs a digital marketing agency in Mumbai. Estimated FY 2025-26 income:

• Business profit (after expenses): ₹15,00,000
• Interest income (savings + FD): ₹50,000
• Section 80C investments: ₹1,50,000
• TDS deducted by 2 clients during the year: ₹40,000

Step 1: Compute taxable income

Gross income = 15,00,000 + 50,000 = ₹15,50,000
− 80C = ₹1,50,000
− 80TTA (savings int up to ₹10,000) = ₹10,000
Taxable income = ₹13,90,000

Step 2: Compute tax (old regime, FY 2025-26)

Up to ₹2.5L = 0
₹2.5L–₹5L @ 5% = ₹12,500
₹5L–₹10L @ 20% = ₹1,00,000
₹10L–₹13.9L @ 30% = ₹1,17,000
Tax = ₹2,29,500
+ 4% cess = ₹9,180
Total liability = ₹2,38,680

Step 3: Subtract TDS

Net tax payable as advance = ₹2,38,680 − ₹40,000 = ₹1,98,680

Step 4: Schedule instalments

How to Pay Advance Tax

1. Visit incometax.gov.in → e-Pay Tax.
2. Enter PAN, confirm name.
3. Select Assessment Year (AY 2026-27 for FY 2025-26 income).
4. Select "(100) Advance Tax" as the type of payment.
5. Enter the amount, bank, and pay via net banking, debit card, or UPI.
6. Save the challan with its CIN — you'll need it when filing ITR.

Interest for Missing Advance Tax

Section 234B — for not paying by 31 March

If advance tax paid is < 90% of total tax liability, interest @ 1% per month from 1 April till date of self-assessment tax payment.

Section 234C — for deferring instalments

Special Case — Capital Gains & Dividend Income

If you have unexpected capital gains (e.g., sold a property in February) or large dividend income, you couldn't have estimated it earlier. The law forgives Sec 234C interest on such income if you pay the related advance tax in the very next instalment after the income arose.

Example: You sold shares with ₹5 lakh gain on 25 February 2026. Pay the additional advance tax by 15 March 2026 to avoid Sec 234C interest.

Common Advance Tax Mistakes

1. Forgetting it exists. Salaried people new to side income often discover it only at ITR time, paying interest.
2. Underestimating income in Q1/Q2 and getting hit by 234C.
3. Forgetting TDS subtraction and overpaying.
4. Wrong Assessment Year on challan (FY 2025-26 income → AY 2026-27, not 2025-26).
5. Wrong code — using "Self-Assessment Tax" instead of "Advance Tax".
6. Not paying by 15 March and assuming "I'll do it before ITR filing".

What's Next?

• Allowable Business Deductions to Reduce Your Advance Tax
• Section 44AD — Simpler Advance Tax Rules
• ITR Filing for Small Businesses