Advance Tax: Who Must Pay and How to Compute It

TL;DR

Section 207 threshold, the 15/45/75/100 percent schedule, and penalties for non-payment under Section 234B and 234C.

Most salaried employees never think about advance tax because their employer deducts tax at source (TDS) on every salary payment and the total TDS over the year usually covers their full income tax liability. But for self-employed individuals, business owners, landlords with rental income, investors with capital gains, and anyone with income not subject to TDS, advance tax is a real and immediate obligation — and failing to pay it correctly triggers interest charges that can be substantial.

What Is Advance Tax

Advance tax is the income tax you pay during the financial year as you earn income, rather than paying the entire tax after the year ends when you file your ITR. The concept is simple: the Income Tax Act says if your estimated tax liability for the year is ₹10,000 or more, you must pay tax in installments during the year, not just at year-end.

The Income Tax Department wants its money as you earn it, not after you file your return.

Who Must Pay Advance Tax

Must Pay Advance Tax:

• Self-employed individuals (freelancers, consultants, business owners)
• Individuals with rental income (if total tax liability exceeds ₹10,000)
• Individuals with capital gains (short-term or long-term)
• Individuals with income from multiple sources where TDS is insufficient
• Partners of firms receiving profit share
• Individuals receiving significant interest income that has no TDS

Exempt from Advance Tax:

• Salaried individuals where TDS on salary is sufficient to cover their full tax liability — though even salaried individuals with multiple incomes or high investments may need to pay advance tax
• Resident senior citizens (60 years or above) who do not have any income from business or profession — they are exempt from advance tax payment (but must still pay by the regular due date)
• Non-Resident Indians (NRIs) — different rules apply

How to Check If You Need to Pay Advance Tax:

Estimate your total income for the year:

1. Add all sources of income (salary, business/profession, house property, capital gains, other sources)
2. Subtract all applicable deductions (80C, 80D, 80CCD, HRA, etc.)
3. Calculate the tax on this net income using the applicable slab rates
4. Subtract any TDS already deducted (from salary, bank interest, dividends, etc.)
5. If the remaining tax is ₹10,000 or more, you must pay advance tax

Advance Tax Payment Schedule

Advance tax is paid in four installments, each with a specific due date and a required cumulative payment percentage.

Installment	Due Date	Percentage of Estimated Annual Tax Payable
1st	June 15	At least 15%
2nd	September 15	At least 45%
3rd	December 15	At least 75%
4th	March 15	100%

Important: The percentages are of your total estimated annual tax liability after subtracting TDS already deducted. You are not paying 15% of your income — you are paying 15% of your estimated net tax liability.

How to Calculate Advance Tax — A Practical Example

Suppose you are a freelancer with the following situation for FY 2025-26:

• Freelance income: ₹20 lakhs
• Deductions (80C, 80D, 80CCD): ₹2 lakhs
• Net taxable income: ₹18 lakhs
• Tax on ₹18 lakhs (old regime): Approximately ₹2,52,500
• TDS already deducted (e.g., from bank interest or previous employer): ₹10,000
• Net tax to pay: ₹2,42,500

Your advance tax installments would be:

• By June 15: 15% of ₹2,42,500 = ₹36,375
• By September 15: 45% of ₹2,42,500 = ₹1,09,125 (cumulative)
• By December 15: 75% of ₹2,42,500 = ₹1,81,875 (cumulative)
• By March 15: 100% of ₹2,42,500 = ₹2,42,500

Since you have TDS of ₹10,000 already deducted, you can reduce this from each installment or claim it at the time of ITR filing. The correct approach is to pay the net amount after accounting for TDS in the installments.

How to Pay Advance Tax

Step 1 — Calculate Your Estimated Tax

Use the Income Tax Department’s online advance tax calculator or your CA to estimate your annual tax liability. It is better to slightly overestimate your income (and therefore your tax) than to underestimate — overpayment is refunded at ITR filing; underpayment triggers interest.

Step 2 — Pay Using Challan ITNS 280

Go to the income tax e-filing portal (incometax.gov.in) or your bank’s net banking:

1. Select “Challan No./ITNS 280”
2. Select “(0021) Income Tax on Companies” or “(0021) Income Tax on Companies (TDS)” for companies; select “(0021) Income Tax on Companies” or appropriate head for individuals
3. Select “(300) Self-Assessment Tax”
4. Enter your PAN, name (as per PAN), financial year, and assessment year (e.g., AY 2026-27 for FY 2025-26)
5. Select your bank (for net banking payment)
6. Pay the installment amount
7. Save the BSR code and Challan Serial Number — you will need these to claim credit when filing ITR

Step 3 — Verify in Form 26AS

The tax paid as advance tax appears in your Form 26AS within 5-7 working days of payment. Verify it appears under the appropriate head (self-assessment tax) before filing your ITR.

Interest Under Section 234B and 234C

This is where people get surprised. The interest provisions are unforgiving.

Section 234B — Interest for Short Payment of Advance Tax

If you fail to pay advance tax (or pay less than 90% of the actual tax liability) by the due date of the last installment (March 15), simple interest at 1% per month is charged on the shortfall from April 1 until the tax is paid.

Example:

• Your actual tax liability is ₹2 lakhs
• You paid ₹1.5 lakhs in advance tax installments
• Shortfall: ₹50,000
• Interest at 1% per month from April 1: ₹500 per month
• If you pay in June: Interest for 2 months = ₹1,000

Section 234C — Interest for Deferred Advance Tax

Even if you pay the full annual amount but in an uneven pattern, interest can be charged. Specifically:

• If the first installment (June 15) is less than 15% of annual tax: interest at 1% per month for 3 months on the shortfall
• If the second installment (September 15) is less than 45%: interest at 1% per month for 3 months on the shortfall
• If the third installment (December 15) is less than 75%: interest at 1% per month for 3 months on the shortfall
• If the fourth installment (March 15) is less than 100%: interest at 1% per month for 3 months on the shortfall

Example of 234C interest:

• Estimated annual tax: ₹2 lakhs
• Required by September 15: ₹90,000 (45%)
• Actually paid by September 15: ₹50,000
• Shortfall: ₹40,000
• 234C interest at 1% per month for 3 months on ₹40,000 = ₹1,200

Note: 234C interest is charged only for 3 months regardless of how late the payment is made — it is not ongoing like 234B.

Section 234A — Interest for Late Filing

If you file your ITR after the due date (July 31 for non-audit cases), simple interest at 1.5% per month is charged on the tax payable from the due date until the date of filing. This is separate from advance tax interest.

Practical Advance Tax Strategy

For Self-Employed and Freelancers:

• At the start of the financial year, estimate your annual income and tax
• Open a dedicated tax savings bank account and transfer 25-30% of each freelance payment into it
• Use this account only for advance tax payments — never let this money get mixed with operating funds
• Pay each installment on time even if it means paying slightly more than the minimum — the interest penalty is worse

For Individuals with Rental Income:

• If your rental income alone generates tax above ₹10,000 after deductions, you must pay advance tax on it
• Budget for 20-30% of net rental income to go toward advance tax

For Individuals with Capital Gains:

• Capital gains are often received in lump sums (property sale, equity mutual fund redemption)
• When you receive a large capital gain, immediately estimate the tax on it and pay advance tax in the next installment
• Advance tax on capital gains is particularly important because TDS is not deducted automatically

Advance Tax vs TDS — The Overlap

The advance tax installments are calculated on your estimated total tax liability minus TDS already deducted. If your employer deducts sufficient TDS on your salary, you may not need to pay any advance tax even as a salaried person.

The challenge arises when:

• You have both salary and freelance income — TDS on salary is not enough to cover total tax
• You have rental income or capital gains on top of salary — TDS on salary was computed without these
• You changed jobs mid-year — TDS was calculated at a job that ended and the new job started fresh

In all these cases, estimate your full-year income at the beginning of the year, compare it to your TDS certificates, and pay advance tax to cover the gap.

Related guides

• Income Tax Notice Response: Section 143(1), 148 & 245 — what to do when advance tax is missed or under-paid and the department issues a Section 234C interest notice or a Section 143(1) intimation with a demand.
• PAN-Aadhaar Link, e-Verification & ITR Processing — ITR filing prerequisites that affect advance-tax credit matching and Section 143(1) processing timelines.