Understanding Advance Tax and Section 87A: Can You Reduce Your Tax Liability?
Tax liability can be a major concern for individuals and businesses, but strategic tax planning can significantly reduce the burden. Two critical provisions under the Income Tax Act, 1961, Advance Tax and Section 87A Rebate, offer opportunities for taxpayers to manage their obligations effectively. Understanding how these provisions work can help taxpayers avoid penalties, optimize cash flow, and even reduce their overall tax outgo.
Table of Contents:
Overview of Tax Liability Reduction
Taxpayers often face situations where they owe taxes at the end of the financial year, leading to lump-sum payments, interest charges, or penalties. Advance tax serves as a mechanism to distribute this liability throughout the year, reducing the financial strain.
On the other hand, Section 87A provides a direct rebate, allowing eligible taxpayers to lower or completely eliminate their tax liability. By leveraging both provisions strategically, taxpayers can ensure they meet compliance requirements while minimizing out-of-pocket tax payments.
Importance of Understanding Advance Tax and Section 87A
Avoiding Interest and Penalties: Failure to pay advance tax on time can lead to additional costs under Sections 234B and 234C. Knowing the rules can help taxpayers stay compliant and avoid unnecessary financial burdens.
Better Financial Planning: Paying taxes in installments (advance tax) prevents last-minute financial stress. The Section 87A rebate, when applicable, further reduces the final tax outgo.
Maximizing Tax Savings: Many taxpayers are unaware of their eligibility for tax benefits, leading to higher payments than required. Understanding these provisions ensures taxpayers make informed financial decisions.
Advance Tax: Key Provisions
Advance tax is a prepayment of income tax, ensuring that taxpayers contribute to their annual tax liability in installments rather than paying it all at once at the end of the financial year. This system helps the government maintain steady revenue inflows while preventing taxpayers from facing large lump-sum payments.
Meaning and Purpose of Advance Tax
Advance tax is a "pay-as-you-earn" system where individuals and businesses with significant income sources—beyond salaried earnings subject to TDS—must estimate their annual income and pay tax in advance. This includes:
Business owners and freelancers with taxable profits.
Investors earning capital gains, interest income, or rental income.
High-income salaried individuals with multiple income sources where TDS is insufficient.
The primary purpose of advance tax is to ensure timely tax collection while helping taxpayers manage their cash flow by spreading tax payments across the financial year.
Sections Governing Advance Tax
Advance tax falls under Sections 207 to 219 of the Income Tax Act, 1961, with key provisions governing:
Section 207: Specifies who is liable to pay advance tax.
Section 208: Sets the threshold for advance tax payments (tax liability exceeding ₹10,000).
Section 209: Lays out the method for estimating income and calculating advance tax.
Sections 234B & 234C: Define interest penalties for non-payment or underpayment of advance tax.
By following these provisions, taxpayers can avoid penalties and plan their tax payments efficiently.
Who Needs to Pay Advance Tax?
Eligibility Criteria
Advance tax is applicable to all taxpayers whose total tax liability for a financial year exceeds ₹10,000, after adjusting for TDS (Tax Deducted at Source). This includes:
Salaried Individuals: If TDS deducted by the employer is insufficient to cover total tax liability (due to income from other sources).
Self-Employed Professionals & Business Owners: Since no TDS is deducted on their income, they must pay advance tax directly.
Freelancers: Income earned without TDS deductions (from clients or online platforms) makes freelancers liable to pay advance tax.
Investors & Traders: Capital gains, dividend income, and rental income often attract taxes beyond TDS deductions.
Taxpayers Under Presumptive Taxation (Sections 44AD & 44ADA): They must pay 100% of their tax liability in one installment by 15th March.
Exemptions from Advance Tax
Certain taxpayers are exempt from paying advance tax, including:
Senior Citizens (60+ years) Without Business Income: Senior citizens with only pension or interest income are not required to pay advance tax.
Taxpayers with Annual Tax Liability Below ₹10,000: If the total tax payable (after TDS) is less than ₹10,000, advance tax is not required.
Salaried Individuals with Complete TDS Coverage: If the employer’s TDS deductions cover the entire tax liability, no additional advance tax is needed.
By understanding these rules, taxpayers can assess their advance tax liability and plan their payments effectively.
Advance Tax Payment Schedule and Deadlines
Advance tax is paid in installments throughout the financial year rather than as a lump sum at the end of the year. The due dates for salaried individuals, business owners, and those opting for the presumptive taxation scheme differ based on the provisions of the Income Tax Act.
Due Dates for Salaried and Business Taxpayers
For taxpayers not covered under the presumptive taxation scheme, advance tax is payable in four installments:
Installment Due Date | Advance Tax Payable (%) |
15th June | 15% of total tax liability |
15th September | 45% of total tax liability |
15th December | 75% of total tax liability |
15th March | 100% of total tax liability |
This applies to individuals, professionals, and businesses whose estimated tax liability exceeds ₹10,000 in a financial year.
If a taxpayer misses any of these deadlines, interest penalties under Sections 234B and 234C may apply.
Advance Tax Obligations for Presumptive Taxation Scheme
Individuals and businesses opting for the presumptive taxation scheme under Sections 44AD and 44ADA have a different advance tax structure:
Installment Due Date | Advance Tax Payable (%) |
15th March | 100% of total tax liability |
Presumptive taxpayers are required to pay the entire tax liability by 15th March of the financial year.
This simplified approach reduces compliance burdens for small businesses and professionals.
Interest and Penalties for Non-Compliance
Failure to pay advance tax on time or in full attracts interest penalties under Sections 234B and 234C of the Income Tax Act.
Section 234B: Interest for Non-Payment or Shortfall in Advance Tax
If a taxpayer fails to pay at least 90% of the total tax liability by 31st March, interest under Section 234B is levied.
The interest is calculated at 1% per month on the outstanding tax amount from 1st April till the date of payment.
This applies if advance tax is not paid at all or is paid inadequately.
Section 234C: Interest for Late Payment of Installments
If a taxpayer fails to pay advance tax in accordance with the prescribed schedule, interest under Section 234C is imposed.
Interest is calculated at 1% per month for a delay in payment.
Different rates apply based on the installment missed and the percentage of tax unpaid.
Consequences of Underpayment and Delayed Payments
Increased Tax Burden: Interest penalties increase the overall tax liability.
Notices from IT Department: Delays or underpayments can trigger tax demand notices.
Cash Flow Disruptions: Unexpected tax dues at the end of the year can impact financial planning.
Timely advance tax payments help avoid unnecessary interest costs and ensure smooth compliance.
Understanding Section 87A Rebate
The Section 87A rebate is a tax relief mechanism for individual taxpayers, allowing them to reduce their tax liability to zero under specific conditions.
Purpose of the Rebate
Section 87A aims to provide tax relief to individuals with lower income levels.
Eligible taxpayers can claim a direct rebate on their total tax liability, reducing their final tax payable.
This rebate is available only to resident individuals and cannot be claimed by HUFs, firms, or companies.
Changes Introduced in the 2025 Union Budget
The Union Budget 2025 has brought key revisions to Section 87A:
Increased Income Threshold
The rebate is now available to taxpayers earning up to ₹12 lakh under the new tax regime.
Previously, the threshold was ₹7 lakh under the new tax regime.
Higher Rebate Amount
The maximum rebate under Section 87A has been increased to ₹60,000 (previously ₹25,000).
If the tax payable is ₹60,000 or lower, the rebate effectively reduces the liability to zero.
Exclusion of Special-Rate Incomes
From FY 2025-26, the rebate cannot be claimed on income taxed at special rates, such as:
Short-term capital gains (STCG) under Section 111A (15%)
Long-term capital gains (LTCG) under Section 112 (20%)
This change prevents taxpayers from claiming rebates on high-income sources that attract separate tax rates.
Eligibility for Section 87A Rebate
Who can claim the rebate?
Section 87A provides a tax rebate to individual taxpayers, effectively reducing or eliminating their tax liability. The eligibility criteria for claiming this rebate are:
The taxpayer must be a resident individual (Hindu Undivided Families (HUFs) and non-residents are not eligible).
The total taxable income (after deductions) must be within the prescribed limit under the respective financial year's rules.
The rebate applies only to the income tax payable before the addition of cess (health & education cess).
Impact of different tax regimes
Section 87A rebate applies differently under the old and new tax regimes:
Tax Regime | Income Eligibility for Rebate | Maximum Rebate |
Old Regime | Up to ₹5,00,000 | ₹12,500 |
New Regime (Pre-2025 Budget) | Up to ₹7,00,000 | ₹25,000 |
New Regime (Post-2025 Budget) | Up to ₹12,00,000 | ₹60,000 |
Under the old tax regime, taxpayers can claim deductions under Sections 80C, 80D, HRA, etc., and still be eligible for the rebate if their taxable income remains within ₹5 lakh.
Under the new tax regime, there are no major deductions, but a higher rebate limit has been introduced in Budget 2025, extending the benefit to those earning up to ₹12 lakh.
Calculating Tax Savings with Section 87A
Examples of rebate calculation
Old Regime Example (FY 2024-25)
Gross income: ₹7,00,000
Deductions (80C, 80D, HRA): ₹2,00,000
Taxable income = ₹5,00,000 → Eligible for ₹12,500 rebate → Net tax payable: ₹0
New Regime (Pre-Budget 2025)
Gross taxable income: ₹7,50,000
No deductions allowed under the new regime
Tax before rebate: ₹25,000
Rebate under Section 87A: ₹25,000 → Net tax payable: ₹0
New Regime (Post-Budget 2025)
Gross taxable income: ₹12,00,000
No deductions allowed under the new regime
Tax before rebate: ₹60,000
Rebate under Section 87A: ₹60,000 → Net tax payable: ₹0
Income scenarios benefiting from the rebate
Salaried employees earning up to ₹12 lakh can completely eliminate their tax liability under the new tax regime.
Freelancers & self-employed individuals who opt for the new tax regime will also benefit from a tax-free income threshold of ₹12 lakh.
Pensioners & senior citizens without business income can take advantage of this rebate if they opt for the new tax regime.
Section 87A: Recent Changes and Restrictions
Exclusion of special-rate incomes
From FY 2025-26, Section 87A rebate cannot be claimed against income taxed at special rates, including:
Short-term capital gains (STCG) under Section 111A (taxed at 15%)
Long-term capital gains (LTCG) under Section 112/112A (taxed at 10% above ₹1 lakh)
Dividend income and winnings from lotteries & game shows
Effect on capital gains and other taxable incomes
Before Budget 2025, taxpayers could claim the rebate even if their income included capital gains. This led to tax avoidance loopholes, where individuals earning ₹12 lakh (including LTCG) could claim the rebate.
Post-2025 Budget, capital gains do not qualify for rebate calculations, meaning individuals with significant gains from stocks, mutual funds, or property will face higher tax liability.
Example:
Taxable Income (including ₹2 lakh STCG @15%): ₹12 lakh
Tax before rebate: ₹60,000
Rebate eligibility: Not applicable (due to STCG component)
Net tax payable: ₹60,000
Taxpayers investing in stocks and real estate must now carefully plan their capital gains to avoid missing out on the Section 87A rebate.
Optimizing Tax Liability: Advance Tax and Section 87A Together
Understanding how advance tax and Section 87A rebate work together can help taxpayers plan their tax payments more effectively and avoid unnecessary financial burdens. The interplay of these provisions is particularly useful for individuals whose tax liability fluctuates during the year.
Adjusting Advance Tax Payments After Rebate Claims
Once a taxpayer estimates their total income for the financial year, they must calculate the tax liability and determine whether the Section 87A rebate applies. If the rebate brings the net tax payable below ₹10,000, the taxpayer is exempt from advance tax payments.
For instance, if an individual’s initial tax liability was estimated at ₹15,000 but they later qualify for a ₹12,500 rebate under Section 87A, their revised net liability would be ₹2,500, well below the ₹10,000 threshold. In such cases, they no longer need to pay advance tax, and any previously paid installments may lead to a refund when filing their return.
Similarly, if income estimates increase mid-year due to salary increments, business profits, or capital gains, taxpayers should recalculate their advance tax obligations. Adjusting payments accordingly ensures they meet compliance requirements while maximizing tax savings.
Scenarios Where Advance Tax May Not Be Required
Income Below the Advance Tax Threshold: If the final tax liability after considering rebates and deductions is under ₹10,000, no advance tax is required.
Senior Citizens Without Business Income: Individuals aged 60 and above with only pension or interest income are exempt from advance tax.
Tax Deducted at Source (TDS) Covers the Liability: If the employer or deductor has already deducted sufficient TDS, the remaining tax liability may be minimal, eliminating the need for advance tax.
Revised Income Calculations: If an individual initially estimated higher taxable income but later revised it downwards (due to deductions or losses), their advance tax obligation may be negated.
Common Mistakes and Compliance Issues
Errors in tax calculations and rebate claims can result in unnecessary penalties, interest, and scrutiny from the tax authorities. Some common pitfalls include:
Errors in Advance Tax Estimation
Underestimating Income: Many taxpayers miscalculate their earnings, especially if they have variable income sources like freelancing, commissions, or business profits.
Ignoring Capital Gains: Taxpayers often overlook capital gains (both short-term and long-term) while computing advance tax liability, leading to underpayment.
Not Considering Interest and Dividend Income: While salary-based taxpayers generally account for TDS deductions, they may forget to include additional income sources that attract tax.
Misinterpretation of Section 87A Applicability
Applying the Rebate to Special-Rate Incomes: Section 87A does not apply to income taxed at special rates (such as capital gains under Sections 111A, 112). Many taxpayers mistakenly assume that rebate benefits extend to all taxable income.
Confusion Between Old and New Tax Regimes: The rebate threshold varies between tax regimes. Under the new regime (post-2025 changes), the threshold is ₹12 lakh, whereas under the old regime, it remains lower. Incorrect regime selection can result in denied rebates.
Claiming Rebate Beyond Eligible Limits: Some taxpayers inadvertently claim more than the allowed rebate, leading to errors in tax calculations and potential demand notices.
Recent Notices and Taxpayer Challenges
With the latest amendments and stricter compliance monitoring, taxpayers have faced increased scrutiny regarding rebate claims and advance tax compliance.
IT Department’s Action on Previous Rebate Claims
In February 2025, the Income Tax Department issued tax demand notices to individuals who had claimed the Section 87A rebate against short-term capital gains (STCG) or other special-rate incomes in the previous financial years. While the 2025 Budget clarified that such claims are now explicitly disallowed, many taxpayers are facing retrospective inquiries for past filings.
The issue arose due to earlier tax filing software allowing rebate claims on capital gains, leading to unintentional errors. The IT Department is reviewing such cases and, in some instances, rejecting rebates that were previously approved.
Handling Tax Demand Notices and Filing Revised Returns
Taxpayers who receive demand notices for rebate discrepancies have two main options:
Filing a Rectification Request: If the rebate was claimed correctly and the demand is erroneous, taxpayers can submit a rectification request under Section 154, providing supporting documentation.
Revised Return Filing: If the rebate was mistakenly claimed against ineligible income, taxpayers should voluntarily file a revised return under Section 139(5) to correct the error and pay any additional tax due, avoiding further penalties.
Many taxpayers have also taken their cases to appellate authorities, arguing that past rebate claims were made in good faith due to system errors. In some instances, relief has been granted, but each case is being assessed individually.
Conclusion
Advance tax and Section 87A rebate offer substantial tax-saving opportunities, but they must be applied correctly to avoid compliance issues. Taxpayers should:
Accurately estimate income and tax liability throughout the financial year.
Adjust advance tax payments based on changing income and applicable rebates.
Be mindful of the exclusions under Section 87A, particularly for special-rate incomes.
Regularly check for government notifications and updates to avoid penalties or tax demand notices.
By proactively managing tax payments and staying informed about legislative changes, taxpayers can minimize their tax liability while ensuring compliance with the Income Tax Act.
FAQs
Q1. What is the primary objective of advance tax?
Advance tax ensures that taxpayers pay their income tax in installments during the financial year rather than a lump sum at year-end. It helps the government maintain a steady flow of revenue and prevents taxpayers from facing a large tax burden at the end of the year.
Q2. Who qualifies for an exemption from advance tax?
Individuals with an estimated annual tax liability of less than ₹10,000 are exempt from paying advance tax. Additionally, senior citizens (aged 60 and above) who do not have income from business or profession are also exempt.
Q3. What happens if I miss an advance tax payment deadline?
If you fail to pay advance tax on time, you may be liable for interest under Section 234B (for not paying 90% of tax by March 31) and Section 234C (for delay in installment payments). The interest is calculated at 1% per month on the unpaid tax amount.
Q4. How does Section 87A help in reducing tax liability?
Section 87A provides a rebate to eligible taxpayers, effectively reducing their tax liability. Under the latest amendment, resident individuals with an annual income up to ₹12 lakh (under the new tax regime) can claim a rebate of up to ₹60,000, potentially reducing their tax liability to zero.
Q5. Can I claim Section 87A rebate under both tax regimes?
No, the eligibility criteria for Section 87A differ under the old and new tax regimes. The rebate is available for individuals under both regimes, but the income threshold varies. The 2025 update extends the rebate to incomes up to ₹12 lakh under the new tax regime, whereas under the old tax regime, it remains at ₹5 lakh.
Q7. Is advance tax mandatory if I expect a refund?
Yes, advance tax is still required if your estimated tax liability exceeds ₹10,000, even if you anticipate a refund later. Refunds typically arise due to excess TDS deductions or adjustments after deductions and exemptions are applied.
Q8. How does the 2025 budget impact Section 87A rebate eligibility?
The 2025 budget increased the income threshold for rebate eligibility from ₹7 lakh to ₹12 lakh under the new regime. However, the rebate can no longer be claimed against special-rate incomes such as capital gains (under Sections 111A and 112), winnings from lotteries, or other income taxed at fixed rates.
Q9. What are the penalties for not paying advance tax on time?
Failure to pay advance tax leads to interest charges under:
Section 234B: 1% interest per month if at least 90% of the total tax liability is not paid by March 31.
Section 234C: 1% interest per month for missing quarterly installment deadlines.
Q10. Can I adjust advance tax payments based on changing income estimates?
Yes, taxpayers can revise their advance tax estimates throughout the year. If income fluctuates, adjustments can be made in subsequent installments to reflect the revised tax liability.
Q11. Is the Section 87A rebate applicable on capital gains income?
No, the 2025 amendment explicitly excludes special-rate incomes like short-term capital gains (STCG) under Section 111A and long-term capital gains (LTCG) under Section 112 from Section 87A eligibility. If your tax liability arises from such income, the rebate cannot be claimed.
Q12. How do I respond to a tax demand notice for Section 87A claims?
If you receive a notice for incorrect Section 87A claims, you can:
Review the tax return to confirm if the rebate was correctly applied.
Check if your income includes capital gains or other ineligible components.
File a revised return if the rebate was mistakenly claimed.
Contest the notice if you believe the rebate was correctly claimed, citing relevant provisions.
Q13. What are the key differences between advance tax and TDS deductions?
Advance tax is self-assessed and paid in installments by individuals and businesses with significant non-TDS income.
TDS (Tax Deducted at Source) is deducted by employers, banks, and other entities at the time of income payment.
If TDS deductions are insufficient to cover total tax liability, advance tax must be paid to bridge the gap.
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