Advance Tax Calculation for Salaried vs Business Professionals: Key Differences Explained
Advance tax is a mechanism under the Indian Income Tax Act, 1961, that requires taxpayers to pay their estimated tax liability in installments throughout the financial year. This system aims to ensure that taxpayers do not face a sudden financial burden at the end of the year when their taxes are due. It applies to individuals and entities whose total estimated tax liability exceeds ₹10,000 during the financial year.
Advance tax is not applicable to every taxpayer. The need to pay advance tax depends on the nature of income, the tax liabilities, and whether tax has already been deducted at source (TDS) by employers or other parties. Understanding how advance tax is calculated and when it is due can help avoid penalties for delayed payments.
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Importance of Understanding Advance Tax Calculation
For both salaried individuals and business professionals, understanding how advance tax is calculated is crucial for effective tax planning. Proper calculation and timely payment can help avoid interest penalties for late payments and allow taxpayers to manage their cash flow more efficiently.
Salaried individuals typically have a straightforward tax structure, but business professionals need to account for more variables, such as income from multiple sources, business expenses, and deductions. Knowing the advance tax calculation process for both categories is essential to ensure compliance with tax laws and avoid financial stress.
Who Needs to Pay Advance Tax?
Salaried Individuals
Salaried individuals are typically subject to Tax Deducted at Source (TDS) by their employers, which covers most of their income tax liability. However, if the total tax liability exceeds ₹10,000 after TDS deductions, the individual must pay advance tax.
Salaried individuals need to consider any additional income, such as freelance work, investments, or rental income, that might not have TDS applied. If such income pushes their total tax liability above ₹10,000, they must pay advance tax in installments.
Business Professionals
Business professionals, including freelancers, self-employed individuals, and consultants, must pay advance tax if their estimated tax liability exceeds ₹10,000. Unlike salaried employees, business professionals usually do not have any TDS deducted at source, so they are responsible for calculating and paying their advance tax. This includes income from their profession as well as any other sources of income such as rent, interest, or capital gains.
Calculation of Advance Tax for Salaried vs Business Professionals
For Salaried Individuals
For salaried individuals, the advance tax calculation typically involves the following steps:
Estimate Total Income: Begin by calculating the total salary income after applying standard deductions.
Add Other Income: Include any additional sources of income, such as interest from savings, investments, or freelance work.
Subtract TDS: Deduct the tax already paid through TDS by the employer.
Calculate Tax Liability: After accounting for deductions like Section 80C (investments), 80D (insurance premiums), etc., compute the final tax liability.
Pay Advance Tax: If the final tax liability exceeds ₹10,000, the individual must pay the remaining amount in four installments as per the due dates.
For Business Professionals
For business professionals, the calculation of advance tax can be more complex due to varied income sources and expenses. The steps involved are:
Estimate Business Income: Start by calculating the income from the business or profession.
Add Other Income: Include income from other sources such as interest, rent, etc.
Subtract Expenses: Deduct business-related expenses like office rent, salaries, travel costs, and any other allowable deductions.
Calculate Tax Liability: After calculating the net income (business income minus expenses), compute the tax liability. This can include deductions under sections like 80C, 80D, etc.
Pay Advance Tax: If the calculated tax liability exceeds ₹10,000, the business professional must pay the advance tax in installments.
Payment Due Dates and Installments
Overview of Due Dates
Advance tax payments are made in four installments during the financial year. The due dates for these payments are as follows:
15th June: 15% of the total advance tax liability
15th September: 45% of the total advance tax liability
15th December: 75% of the total advance tax liability
15th March: 100% of the total advance tax liability
These due dates help taxpayers spread their tax liability across the year, preventing a lump sum payment at the end of the financial year.
Penalties for Delay
If the advance tax payment is not made by the due date, taxpayers will incur an interest penalty under Section 234B and 234C of the Income Tax Act. The penalty is:
1% interest per month on the unpaid amount from the due date until the date of payment.
Failure to pay advance tax on time can result in significant penalties, making timely payment crucial.
Key Differences Between Salaried Individuals and Business Professionals
Income Sources
Salaried Individuals: The primary source of income for salaried individuals is their salary from employment. Any additional income may come from investments, rental income, or freelance work.
Business Professionals: Business professionals, including freelancers, consultants, and self-employed individuals, typically have varied income sources. These can include profits from their business, consultancy fees, or income from services provided.
TDS Consideration
Salaried Individuals: TDS (Tax Deducted at Source) is typically deducted by employers on salary payments. The amount of TDS deducted is adjusted against the individual's total tax liability.
Business Professionals: Business professionals generally do not have TDS deducted by clients unless specified under specific provisions. They must estimate their tax liability accurately and pay advance tax accordingly, without the benefit of automatic tax deductions like salaried individuals.
Exemptions and Deductions
Salaried Individuals: Salaried individuals can claim certain exemptions such as HRA (House Rent Allowance) and deductions under Section 80C, 80D, and 80CCD(1B), among others.
Business Professionals: Business professionals have more opportunities for deductions related to business expenses, such as office rent, employee salaries, professional fees, and other operating expenses. They also have the option to opt for the presumptive taxation scheme under sections 44AD and 44ADA, which simplifies their tax calculation.
Additional Insights on Advance Tax
Presumptive Taxation Scheme
For small businesses and professionals, the presumptive taxation scheme under sections 44AD (for businesses) and 44ADA (for professionals) allows them to pay tax on a presumed income at a fixed percentage of their turnover or gross receipts. This eliminates the need for detailed accounting and simplifies compliance. Under this scheme, taxpayers are required to pay their entire advance tax in one installment by March 15, rather than in quarterly installments.
Impact of Alternate Personal Tax Regime (APTR)
The Alternate Personal Tax Regime (APTR), introduced in FY 2024-25, offers revised tax slabs but excludes exemptions and deductions like HRA, 80C, and others. Both salaried individuals and business professionals need to assess their eligibility for either the old regime or the new regime based on their total deductions and income to determine the most beneficial option for advance tax calculation.
Senior Citizen Exemption
Senior citizens (aged 60 years or older) who do not have any business income are exempt from paying advance tax. This exemption is applicable to individuals who earn primarily from pension, interest, or other passive income. However, if they have business income, the senior citizen exemption does not apply, and they must calculate and pay advance tax accordingly.
Examples on Advance Tax Calculation
Let us explore the advance tax calculation process for both salaried individuals and business professionals under the old and new tax regimes for FY 2024-25. This comparison will clarify how different factors such as income, deductions, and TDS affect the tax liability.
Example 1: Salaried Individual Advance Tax Calculation
Old Regime
Component | Amount |
Salary Income | ₹15,00,000 |
Interest Income | ₹20,000 |
Gross Income | ₹15,20,000 |
Standard Deduction | ₹50,000 |
PPF Deduction | ₹1,50,000 |
Medical Insurance Deduction | ₹25,000 |
Total Deductions | ₹1,75,000 |
Taxable Income | ₹12,95,000 |
Tax Liability | ₹2,17,000 |
TDS | ₹1,50,000 |
Advance Tax Liability | ₹67,000 |
New Regime
Component | Amount |
Salary Income | ₹15,00,000 |
Interest Income | ₹20,000 |
Gross Income | ₹15,20,000 |
Standard Deduction | ₹75,000 |
Taxable Income | ₹14,45,000 |
Tax Liability | ₹2,35,000 |
TDS | ₹1,50,000 |
Advance Tax Liability | ₹85,000 |
Example 2: Business Professional Advance Tax Calculation
Old Regime
Component | Amount |
Business Income | ₹15,00,000 |
Interest Income | ₹10,000 |
Gross Income | ₹15,10,000 |
Business Expenses | ₹5,00,000 |
Net Business Income | ₹10,10,000 |
PPF Deduction | ₹1,00,000 |
Taxable Income | ₹9,10,000 |
Tax Liability | ₹1,50,000 |
No TDS | ₹0 |
Advance Tax Liability | ₹1,50,000 |
New Regime
Component | Amount |
Business Income | ₹15,00,000 |
Interest Income | ₹10,000 |
Gross Income | ₹15,10,000 |
Business Expenses | ₹5,00,000 |
Net Business Income | ₹10,10,000 |
Taxable Income | ₹10,10,000 |
Tax Liability | ₹1,80,000 |
No TDS | ₹0 |
Advance Tax Liability | ₹1,80,000 |
Advance Tax Installments
For both salaried individuals and business professionals, advance tax is paid in four installments throughout the year. Below is the payment schedule for both regimes:
Salaried Individual
Due Date | Old Regime | New Regime |
15th June | ₹10,050 | ₹12,750 |
15th September | ₹25,275 | ₹32,625 |
15th December | ₹23,925 | ₹26,625 |
15th March | ₹7,750 | ₹13,000 |
Business Professional
Due Date | Old Regime | New Regime |
15th June | ₹22,500 | ₹27,000 |
15th September | ₹40,500 | ₹54,000 |
15th December | ₹31,500 | ₹45,000 |
15th March | ₹55,500 | ₹54,000 |
Online Payment Process for Advance Tax
Paying advance tax online is a simple process through the Income Tax Department’s website or using platforms like Netbanking Lite. Here’s a step-by-step guide:
Visit the Income Tax Department Website:Go to the official Income Tax e-filing portal at https://incometaxindiaefiling.gov.in.
Login:
Enter your PAN and password to log in to your account.
If you don’t have an account, create one by registering on the portal.
Navigate to 'Pay Tax':Once logged in, find the 'e-Pay Tax' option under the 'Services' section.
Select Advance Tax Payment:From the list of tax payment types, choose 'Advance Tax'.
Enter Details:
Fill in your PAN, assessment year, and amount of tax to be paid.
Ensure you select the correct bank account for payment.
Choose Mode of Payment:You can pay using Net Banking or Debit/Credit Cards.
Make Payment:After confirming the details, submit the payment and get the challan receipt. Keep the challan number for future reference.
Download the Receipt:Once the payment is complete, download the payment receipt and keep it for your records.
Union Budget Updates
The Union Budget 2024-25 introduced several key changes that may affect the advance tax calculation for both salaried individuals and business professionals. Notable changes include:
New Tax Slabs and Reduced Rates:The revised personal income tax slabs under the new tax regime offer lower tax rates for individuals opting for it, which could result in reduced advance tax payments. However, deductions and exemptions are not available under this regime.
Presumptive Taxation Scheme:For small businesses and professionals under sections 44AD and 44ADA, advance tax is required to be paid in a single installment by March 15, simplifying tax payments for eligible taxpayers.
Changes in Tax Deducted at Source (TDS):For business professionals, TDS on payments received from clients may now be adjusted against advance tax payments, reducing the upfront amount payable.
Tax Relief for Senior Citizens:Senior citizens who do not have business income are exempt from advance tax payments, a relief measure aimed at retirees with only passive income sources.
Conclusion
Understanding the key differences in advance tax calculation for salaried individuals versus business professionals is essential for effective tax planning. While salaried individuals primarily pay advance tax based on their salary income and TDS deductions, business professionals must account for diverse income sources and business expenses. By accurately calculating their tax liability and adhering to advance tax deadlines, both groups can avoid penalties and ensure compliance with Indian tax laws.
Before making your advance tax payments, it’s crucial to assess your income, expenses, and applicable exemptions to determine which tax regime offers the most benefits.
FAQs
1. Who needs to pay advance tax?
Advance tax must be paid by individuals whose total tax liability for the year exceeds ₹10,000 after accounting for TDS. This includes salaried individuals with additional income and business professionals with significant earnings.
2. Can I pay advance tax if my employer deducts TDS?
Yes, salaried individuals may still need to pay advance tax if they have additional income beyond their salary (such as interest or freelance income), which is not covered by TDS. The advance tax will be based on this additional income.
3. What if my income is not fixed?
For individuals with variable income, such as business professionals or freelancers, the advance tax should be paid on the estimated income for the year. You can revise your estimates and make adjustments in subsequent installments if your income fluctuates.
4. Can I pay advance tax in installments?
Yes, advance tax is paid in four installments:
15% by 15th June
45% by 15th September
75% by 15th December
100% by 15th March
5. What happens if I miss the advance tax payment due date?
Failure to pay advance tax by the due dates attracts an interest penalty of 1% per month on the unpaid amount, which increases if payments are delayed further.
6. Can I change my advance tax installments if I overestimate or underestimate my income?
Yes, if your income changes during the year, you can revise your advance tax estimates. Revised estimates can be submitted with the next installment of advance tax.
7. Are business professionals required to pay advance tax?
Yes, business professionals, freelancers, and self-employed individuals must pay advance tax if their total estimated tax liability exceeds ₹10,000. Unlike salaried individuals, they do not have TDS automatically deducted and must estimate their income and tax liabilities.
8. What deductions can I claim while calculating advance tax?
While calculating advance tax, both salaried individuals and business professionals can claim deductions like:
Section 80C (PPF, EPF, ELSS, etc.)
Section 80D (health insurance premiums)
Section 80G (donations)
Section 24(b) (home loan interest for self-occupied property)
9. Can I claim HRA while calculating advance tax?
Yes, salaried individuals can claim HRA exemption while calculating their advance tax, provided they meet the eligibility criteria and have paid rent for their accommodation.
10. How is advance tax different for the old and new tax regimes?
In the old tax regime, taxpayers can claim a wide range of deductions and exemptions, which can reduce their taxable income and advance tax liability. The new tax regime offers lower tax rates but removes most exemptions and deductions, leading to a higher tax liability for some taxpayers.
11. Is there any exemption from advance tax for senior citizens?
Yes, senior citizens (aged 60 years or older) who do not have any business income are exempt from paying advance tax. They only need to pay tax at the time of filing their return.
12. How do I make advance tax payments online?
Advance tax payments can be made online through the Income Tax e-filing portal or via net banking. After logging into the portal, select "e-Pay Tax," choose Advance Tax, fill in the payment details, and submit the payment using available options like net banking or debit/credit cards. A receipt is generated upon successful payment.
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