Know This In Advance Before Paying Advance Tax

In this enlightening dialogue between Arjuna and Krishna, taxpayers are guided through the concept and nuances of Advance Tax. Krishna explains that advance tax is paid in installments across the year based on estimated income, rather than in a lump sum at year-end. The first installment for AY 2026-27 is due on 15th June 2025, and 15% of the estimated tax liability must be paid. The discussion also highlights methods of estimating tax liability, new TDS provisions under Section 194T impacting partnership firms, and exemptions available for certain individuals. Krishna emphasizes the importance of timely compliance to avoid penalties.

Arjuna (Fictional Character): Krishna, Many taxpayers are unsure about what advance tax is. Kindly explain the same for our taxpayers and also tell if any advance tax is to be paid in the current month?

Krishna (Fictional Character): Arjuna, Advance tax is the income tax paid in installments throughout the year, rather than a lump-sum payment at the end of the year. Also referred to as "pay-as-you-earn" tax, it is paid in advance based on due dates set by the income tax department. 15th June 2025 is the due date for the payment of First Installment of Advance Tax for the AY 26-27. The taxpayers are required to pay 15% of their total estimated tax liability for the year in the first installment.

Arjuna (Fictional Character): Krishna, How should the taxpayer assess his tax liability for the calculation of advance tax?

Krishna (Fictional Character): Arjuna, there are two practical methods used for the purpose of calculating Advance Tax Liability. First method been the calculation of required percentage on the basis of last years total tax liability. For example, 15% of the last years total tax liability for the first installment. Second Method been the estimation of current years total income, calculating total tax on such income and then paying 15 % of the total tax estimated.

The use of first method based on last years tax would be inappropriate for the current year as there has been significant changes in the slab rates for Individuals and HUFs which will affect the current years total tax liability. The taxpayers may take last year's income as a base and then calculate total tax liability as per new slabs for the purpose of calculation of Advance Tax.

Arjuna (Fictional Character): Krishna, what should the partners of partnership firms keep in mind before paying advance tax?

Krishna (Fictional Character): Arjuna, CBDT have introduced New Section 194T for TDS deduction at the rate of 10% on salary, bonus, commission, remuneration and interest on capital, if the amount exceeds Rs. 20,000 in a financial year w.e.f 1st April 2025. Earlier the partner had to assess or estimate the total income of the above nature, for including them in their total income for the year, while calculating the advance tax liability.

Now with TDS being deducted on these payments, the partners advance tax liability would reduce significantly as the burden is now on firms to deduct and deposit the taxes on such payments.

Arjuna (Fictional Character): Krishna, who are exempt from the requirement of paying Advance Tax?

Krishna (Fictional Character): Arjuna, the following persons are exempted from the payment of Advance Tax:

1. Persons with total income upto Rs. 10,000 in a financial year.

2. People aged 60 years or more who do not have income from any business or professional during the financial year.

3. Persons who have opted to pay tax under the Presumptive Taxation Scheme in Sec 44AD or 44ADA. They are required to pay the entire tax liability for the year in one installment by 15th March of the Current Financial Year.

Arjuna (Fictional Character): Krishna, what shall the taxpayers learn from this?

Krishna (Fictional Character): Arjuna, "Pay as you Earn" is the policy followed by our tax systems, where the tax on the total income is to be deposited in 4 installments during the current year itself. The taxpayers shall take note of the recent changes in the tax slab rates and also related provisions before assessing their advance tax liabilities and shall promptly pay the required percentage on the same before the due date to avoid interest liabilities.