Advance tax is the mechanism of "pay-as-you-earn" under S.207-211. Tax on estimated income of the current year is paid in instalments during the year itself, rather than as a lump sum after the year ends. It ensures a steady flow of revenue to the government and prevents taxpayers from accumulating large tax liabilities.
Legal Framework
| Provision | Content |
|---|---|
| S.207 | Liability for advance tax: tax payable in advance during the financial year |
| S.208 | Conditions: advance tax payable if estimated tax liability ≥ Rs.10,000 |
| S.209 | Computation of advance tax (estimate income, apply rates, reduce TDS) |
| S.210 | Payment by order of AO (demand notice) |
| S.211 | Due dates for payment of instalments |
| S.234B | Interest for failure to pay advance tax (default in payment) |
| S.234C | Interest for deferment of advance tax instalments |
Who Must Pay Advance Tax
| Category | Condition |
|---|---|
| Every person (individual, HUF, firm, company, etc.) | Tax liability after TDS ≥ Rs.10,000 in a financial year |
| Exception: Resident senior citizen (age ≥ 60) | NOT liable if no income from business/profession (S.207 proviso) |
| Companies | Must pay advance tax regardless of income level (if tax > Rs.10,000) |
| Presumptive income (S.44AD) | Can pay entire advance tax by 15 March (single instalment) |
Due Dates and Instalments (S.211)
| Instalment | Due Date | Cumulative % (Non-corporate and Corporate) |
|---|---|---|
| 1st instalment | On or before 15 June | 15% of advance tax |
| 2nd instalment | On or before 15 September | 45% of advance tax |
| 3rd instalment | On or before 15 December | 75% of advance tax |
| 4th instalment | On or before 15 March | 100% of advance tax |
Why: The instalment system distributes the payment burden across the year, matching tax payments to the period in which income is earned. Without advance tax, the government would receive revenue only after March, creating a cash flow gap of 12+ months.
Computation of Advance Tax (S.209)
| Step | Particular |
|---|---|
| 1 | Estimate total income for the current financial year |
| 2 | Compute tax on estimated income at applicable rates |
| 3 | Add surcharge and cess |
| 4 | Less: TDS/TCS likely to be deducted/collected during the year |
| 5 | Balance = Advance tax payable |
| 6 | If balance ≥ Rs.10,000, advance tax is payable in instalments |
Interest for Default
| Section | Default | Interest rate | Period |
|---|---|---|---|
| S.234B | Non-payment or short payment of advance tax (< 90% of assessed tax) | 1% per month (simple) | From April of AY to date of assessment/regular assessment |
| S.234C | Deferment (shortfall in any instalment) | 1% per month (simple) | 3 months per instalment shortfall |
Worked Example: Advance Tax Instalments
Facts: Mr. Joshi's tax liability for FY 2025-26 is estimated at Rs.2,00,000. TDS expected: Rs.80,000. Compute advance tax due dates and amounts.
Step 1: Advance tax payable = Rs.2,00,000 minus Rs.80,000 (TDS) = Rs.1,20,000 Since Rs.1,20,000 > Rs.10,000 → advance tax is mandatory.
Step 2: Instalments:
| Due date | Cumulative % | Amount due | Cumulative paid |
|---|---|---|---|
| 15 June 2025 | 15% | 15% × 1,20,000 = Rs.18,000 | Rs.18,000 |
| 15 September 2025 | 45% | 45% × 1,20,000 = Rs.54,000 (pay Rs.36,000 more) | Rs.54,000 |
| 15 December 2025 | 75% | 75% × 1,20,000 = Rs.90,000 (pay Rs.36,000 more) | Rs.90,000 |
| 15 March 2026 | 100% | 100% × 1,20,000 = Rs.1,20,000 (pay Rs.30,000 more) | Rs.1,20,000 |
What if Mr. Joshi pays nothing until 15 March?
- S.234C interest (deferment): 1% per month on shortfall for each instalment period
- Jun shortfall: 1% × 3 months × Rs.18,000 = Rs.540
- Sep shortfall: 1% × 3 months × Rs.54,000 = Rs.1,620
- Dec shortfall: 1% × 3 months × Rs.90,000 = Rs.2,700
- Mar shortfall: 1% × 1 month × Rs.1,20,000 = Rs.1,200
- Total S.234C interest = Rs.6,060
Exam tip: S.234C is calculated on the CUMULATIVE shortfall at each instalment date, not on the instalment amount alone.
S.234B Computation
Interest = 1% per month on (assessed tax minus advance tax paid), from 1st April of AY to date of determination of income under regular assessment.
S.234C Computation
| If shortfall in instalment by 15 June | 1% × 1 month × (15% of tax minus amount paid) |
|---|---|
| If shortfall by 15 September | 1% × 3 months × (45% minus cumulative paid) |
| If shortfall by 15 December | 1% × 3 months × (75% minus cumulative paid) |
| If shortfall by 15 March | 1% × 1 month × (100% minus cumulative paid) |
Recall Check
- What is the threshold for advance tax liability?
- What are the four due dates for advance tax instalments?
- What interest is charged for non-payment of advance tax?
Key Cases
CIT v. Ogale Glass Works (1954) CIT-v-Ogale-Glass-Works-1954 Issue: Whether interest under advance tax provisions is compensatory or penal in nature. Rule: Interest for delayed payment of advance tax is compensatory (compensation to government for delayed receipt of revenue), not penal. Held: Advance tax interest is not a penalty but compensation for the use of money that should have been paid to the government. It is mandatory and automatic upon default; no discretion with the AO.
Distinctions
| Feature | Advance Tax | Self-Assessment Tax | TDS |
|---|---|---|---|
| Timing | During the financial year (quarterly) | At the time of filing return | At time of payment/credit |
| Who pays | Assessee (taxpayer) | Assessee | Deductor (payer) |
| Basis | Estimated income | Actual computed income | Prescribed rates on specified payments |
| Section | S.207-211 | S.140A | S.192-206 |
| Default interest | S.234B, S.234C | S.234A (if tax remains unpaid) | S.201 (deductor treated as assessee in default) |
Flashcards
Q: What is the minimum threshold for advance tax liability? A: Rs.10,000 (if estimated tax liability after TDS exceeds Rs.10,000).
Q: By when must 45% of advance tax be paid? A: By 15 September of the financial year.
Q: What is the rate of interest under S.234B? A: 1% per month (simple interest) on the shortfall from 1st April of the AY.
Q: Are senior citizens liable to pay advance tax? A: Resident senior citizens (≥ 60 years) with no business/profession income are exempt from advance tax (S.207 proviso).
Q: What is the interest under S.234C? A: 1% per month (simple) for each period of shortfall in instalment payments.
Q: What is the nature of advance tax interest per Ogale Glass Works? A: Compensatory (not penal). It compensates the government for delayed receipt of revenue.
Exam Scenario
Mr. Rao estimates his total income for FY 2025-26 at Rs.15 lakh (tax liability Rs.2,62,500 after cess). His TDS is expected to be Rs.1,50,000. He pays no advance tax. Compute interest under S.234B.
Approach: Net advance tax payable = Rs.2,62,500 minus Rs.1,50,000 (TDS) = Rs.1,12,500. Since Rs.1,12,500 > Rs.10,000, advance tax was payable. He paid NIL advance tax. Advance tax paid (including TDS) = Rs.1,50,000. Assessed tax = Rs.2,62,500. Since advance tax paid (Rs.1,50,000) < 90% of assessed tax (Rs.2,36,250), S.234B applies. Interest = 1% per month × shortfall (Rs.2,62,500 minus Rs.1,50,000 = Rs.1,12,500) × number of months (April to date of assessment). If assessed on 31 July: 4 months × 1% × Rs.1,12,500 = Rs.4,500.