Everything about advance taxes

Why should investors and traders pay advance tax?

Paying taxes is often seen as an annual ritual during the filing of Income Tax Returns (ITR). In reality, it’s a continuous process, and one aspect of this process that often goes unnoticed is advance taxes.

Since the deadline for 3rd instalment of advance tax is approaching soon, traders and investors should check if they have an advance tax liability and pay the same before 15th December 2023.

In this blog post, we’ll delve into the world of advance taxes, covering everything from its definition to the myths surrounding it, how to calculate the liability, penalties for late payment, and the process of paying advance taxes online. You can also watch video on this topic below.

What is advance tax?

Advance tax is essentially a proactive approach to paying taxes. Instead of paying the entire tax liability at the end of the financial year, individuals and businesses estimate their tax and pay it over four instalments within the same financial year.

It’s also known as “pay as you earn” tax, ensuring a smooth and constant flow of income for the government throughout the year.

When is advance tax applicable?

Advance tax is applicable to individuals and businesses whose estimated tax liability for the financial year exceeds a certain threshold.

According to Section 208 of the Income Tax Act, individuals with an estimated tax liability of Rs 10,000 or higher are obligated to pay advance tax. However, senior citizens aged 60 years or above, without income from business or profession, are exempt from advance tax.

Below are the four instalments of advance tax:

Myths about advance tax

1. Salaried individuals: Some believe salaried individuals don’t have to pay advance taxes because TDS is deducted by employers. However, if additional income sources exist, such as rental income or dividends, advance tax obligations may apply.
2. Traders & investors: There’s a misconception that traders and investors can pay advance tax at the end of the financial year. In reality, it’s a quarterly obligation. Profits from trading or capital gains must be estimated and paid in instalments.
3. Businesses and professionals: While businesses under presumptive taxation can pay the entire advance tax by 15th March, others must adhere to quarterly timelines to avoid interest penalties.

Advance tax for traders & investors

Most traders and investors don’t know how to calculate their advance tax liability in the first place. And they assume that they will wait for the financial year to end, see if they make a net profit or loss, and then pay taxes.

But advance taxes have to be paid on a quarterly basis.

Now there’s a bit of a nuance depending on whether you are an investor or trader.

Since profits from F&O and intraday are considered business income, traders will have to estimate their profits for the entire financial year and pay the applicable advance taxes as per the four instalments.

Now if at the end of the financial year, you have calculated and paid additional taxes or you make net losses from all your trades, you can always claim a refund while filing the ITR.

The same process can be followed by investors as well, who have earned capital gains from their investments.

However, because it is not possible to accurately predict the amount of capital gains in advance, the government allows you to pay advance tax on capital gains on an accrual basis.

This means that instead of assuming and estimating your capital gains for the entire year, you can calculate them on a quarterly basis. For instance, if you earn 100 rupees in capital gains in Q1, you can simply pay 15% advance tax on those gains.

And then in the second quarter, if you earn another 50 rupees in capital gains, your advance tax will be calculated on the total realised gains of 150 rupees. However, your net pay would be adjusted against the advance tax paid in first quarter.

How to calculate advance tax liability?

Calculating advance tax liability yourself can be complex. Thus, you can check the Advance Tax Calculator by Quicko to help you determine your advance tax liability.

It considers your income from various heads, deductions on investments in tax-saving investments, and tax payments already made in the form of TDS, TCS, etc. to determine your total advance tax liability.

Check out Quicko’s Advance Tax Calculator here.

Interest on late payment of advance tax

If advance tax isn’t paid on time, a simple interest of 1% per month on the outstanding amount is applicable under Sections 234B and 234C.

How to pay advance tax online?

While both offline and online options exist, paying advance tax online is efficient. Here’s a step-by-step guide:

1. Visit the e-filing portal of the Income Tax Department.
2. Click on ‘e-Pay Tax’ under ‘Quick Links.’
3. Enter PAN, mobile number, and OTP.
4. Select ‘Income Tax’ and the relevant assessment year.
5. Enter tax details and choose a payment method.
6. Preview details and click ‘Pay Now.’

Save the tax receipt for future reference during ITR filing.

Conclusion

Understanding and complying with advance tax regulations is essential to avoid penalties and last-minute burdens at the end of financial year.

If you found this information valuable, please feel free to ask any questions or share your thoughts in the comments. You can also visit Quicko, India’s leading tax filing platform, if you want any further assistance with understanding your advance tax liability and paying the same.

Until next time, this is your guide to understanding advance taxes!