A comprehensive guide on advance tax

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A comprehensive guide on advance tax

Advance tax is income tax paid in four prescribed instalments during the financial year, not as a lump sum at year-end. For FY 2026-27 (Assessment Year 2027-28), any taxpayer whose estimated income tax liability — after crediting TDS and TCS — exceeds ₹10,000 must pay advance tax by the scheduled due dates. Fail to do so, or under-pay an instalment, and Sections 234B and 234C of the Income-tax Act, 1961 start charging simple interest at 1% per month. This guide gives you every number, date, formula and step you need.

Who Must Pay Advance Tax

The ₹10,000 threshold

The obligation is triggered when your estimated net tax liability for the year, after reducing TDS and TCS already deducted or reasonably expected to be deducted, exceeds ₹10,000. This applies to:

• Individual taxpayers (resident and non-resident), HUFs, partnership firms and LLPs
• Domestic and foreign companies
• All sources of income — salary, business, capital gains, house property, other sources

Who is exempt

Resident senior citizens aged 60 or above during FY 2026-27 who have no income from business or profession are fully exempt. They can settle their entire tax liability on 31 March 2027 without incurring interest under Section 234B or 234C.

Salaried individuals often assume their employer's TDS covers everything. It does — but only for income the employer knows about. Capital gains from mutual fund or equity sales, rental income, interest, dividends, freelance fees, ESOP perquisites and cryptocurrency gains sit entirely outside the payroll TDS workings. The moment these push your net liability above ₹10,000, advance tax is mandatory even if your employer is deducting full TDS on your salary.

Presumptive-scheme taxpayers

If you are under Section 44AD (small business, turnover within the prescribed limit) or Section 44ADA (professionals, gross receipts within the prescribed limit), the four-instalment schedule does not apply to you. You pay the entire advance tax in a single instalment by 15 March 2027. Miss that single date and Section 234B interest runs from 1 April 2027.

FY 2026-27 Instalment Due Dates

A few points worth noting:

• The percentages apply to the estimated annual gross tax (before netting off TDS). TDS is credited against the total at year-end, not deducted instalment by instalment.
• Payments made after 15 March but on or before 31 March 2027 are still treated as advance tax for Section 234B purposes, but Section 234C interest for the shortfall between 15 March and the actual payment date may still apply.
• Payments made after 31 March 2027 are self-assessment tax — a different minor head with different interest consequences.
• If a due date falls on a bank holiday or Sunday, verify the next working day on the NSDL TIN portal before assuming a grace period applies; the Income-tax Act does not explicitly guarantee one.

How to Calculate Your Advance Tax Liability

Step 1 — Project total income from every head

Work through each income head with realistic numbers:

• Salary: Gross CTC minus standard deduction and profession tax (as applicable under your chosen regime)
• Business or profession: Projected net profit after all allowable deductions
• House property: Net annual value minus 30% standard deduction and interest on housing loan
• Capital gains: Separate projections for short-term (STCG) and long-term (LTCG), at the rates applicable post the Finance Act amendments — equity STCG at 20%, equity LTCG above the ₹1.25 lakh exemption at 12.5% without indexation, as per current amendments; verify applicable rates for the year
• Other sources: Fixed deposit interest (accrual basis), savings bank interest, dividends, winnings, cryptocurrency gains

Step 2 — Apply the tax regime and compute gross tax

For FY 2026-27, the new tax regime is the default. Apply the slab rates as notified under the Finance Act applicable to FY 2026-27. Add surcharge at the rate applicable to your income level (surcharge on equity capital gains is capped at 15%). Add health and education cess at 4% on tax plus surcharge.

If you prefer the old regime — with its deductions under Chapter VI-A, HRA exemption, LTA and so on — you must opt in explicitly before the prescribed deadline. Run both computations in April itself; switching back after the year is running becomes complicated.

Step 3 — Reduce TDS and TCS credits

Subtract the TDS you expect each deductor to deduct during the year:

• Employer TDS under Section 192 (salary)
• Bank TDS under Section 194A (FD and interest)
• Client TDS under Section 194J (professional or technical fees, typically 10%)
• Tenant TDS under Section 194IB (rent above ₹50,000 per month)
• TCS collected on foreign remittances, LRS, car purchases and so on

The balance after this reduction is your net advance tax liability. If it exceeds ₹10,000, advance tax is due.

Step 4 — Distribute across instalments and re-estimate quarterly

Multiply the gross tax by each instalment's cumulative percentage to get the scheduled payment. Then reduce by TDS expected before each due date to arrive at the cash you actually need to remit. Revisit this working after each quarter as income and TDS actuals firm up.

Worked Example: Advance Tax for a Bangalore Consultant

Scenario: Priya is an independent HR consultant in Bangalore. Her FY 2026-27 projections at the start of the year are:

• Consulting fees (net of expenses): ₹30 lakh
• Fixed deposit interest: ₹2 lakh
• Equity LTCG (estimated): ₹1.8 lakh above the ₹1.25 lakh threshold → taxable ₹55,000
• Total taxable income: ₹32.55 lakh

Under the new tax regime at FY 2026-27 rates as notified, assume her gross tax works out to ₹6,00,000 (illustrative round figure; compute your own using the applicable slab table).

Add 4% cess: ₹24,000. Total gross tax: ₹6,24,000.

Expected TDS:

• Section 194J on consulting fees (10% on ₹30 lakh): ₹3,00,000
• Section 194A on FD interest: ₹20,000
• Total expected TDS: ₹3,20,000

Net advance tax to be paid in cash: ₹6,24,000 − ₹3,20,000 = ₹3,04,000

Instalment schedule (working on gross tax of ₹6,24,000):

By 31 March 2027, Priya has paid ₹3,04,000 in advance tax and has ₹3,20,000 in TDS credits — totalling ₹6,24,000, exactly her liability. She files the ITR, reconciles on Form 26AS, and is interest-free.

Sections 234B and 234C: How Interest Is Actually Computed

Section 234C — Per-instalment shortfall interest

If you miss or underpay a scheduled instalment, Section 234C charges simple interest at 1% per month (or part of a month counts as a full month) on the shortfall.

The shortfall at each date is: cumulative amount required minus advance tax actually paid cumulatively.

Continuing Priya's example — if she paid nothing by 15 June 2026:

• Required cumulative: ₹48,600. Paid: ₹0. Shortfall: ₹48,600.
• 234C interest = 1% × 3 months × ₹48,600 = ₹1,458

If she then paid only ₹48,600 (catching up to June level only) by 15 September — not the required ₹1,45,800 — the September shortfall is ₹97,200:

• 234C interest = 1% × 3 months × ₹97,200 = ₹2,916

These amounts feel modest, but they are non-deductible and avoidable.

Key exception for unanticipated income: If a shortfall arises specifically from capital gains, casual income (lottery, prize money) or dividends that genuinely could not have been estimated at the time of the earlier instalment, Section 234C interest is waived for that specific shortfall — provided you pay the full tax on that income in the immediately following instalment or by 31 March 2027, whichever falls later. This exception is narrow and fact-specific. It does not cover equity sales you planned months ago.

Section 234B — Year-end shortfall interest

Section 234B applies when advance tax paid is less than 90% of assessed tax by 31 March 2027. Interest runs at 1% per month from 1 April 2027 until the date of actual payment.

Example: Priya's assessed tax is ₹6,24,000. Ninety percent = ₹5,61,600. If total advance tax plus TDS credits by 31 March is only ₹5,00,000 (perhaps because two clients delayed filing their TDS returns), the shortfall is ₹61,600. If she clears this on 25 July 2027 when filing her ITR:

• 234B interest = 1% × 4 months × ₹61,600 = ₹2,464

This sum is payable alongside the balance tax before the ITR can be filed without generating a tax demand.

How to Pay Advance Tax: Challan 280, Step by Step

Advance tax is paid using Challan ITNS 280 through the e-Pay Tax module on incometax.gov.in. Follow this exact sequence:

1. Go to incometax.gov.in → e-File → e-Pay Tax.
2. Enter your PAN and registered mobile number; authenticate via OTP.
3. Click 'Income Tax' and then 'Proceed'.
4. On the payment form, select:
5. Tax Applicable: (0021) Income Tax (Other than Companies) for individuals, HUFs, firms and LLPs; (0020) Corporation Tax for companies.
6. Type of Payment: (100) Advance Tax.
7. Assessment Year: 2027-28 (for all FY 2026-27 advance tax payments — this is the single most common entry error).
8. Enter the breakup — Basic Tax, Surcharge, Education Cess, Interest — in the respective fields. You can enter the entire net amount under Basic Tax if surcharge and interest are nil.
9. Choose your payment mode: net banking is fastest for same-day credit; UPI and debit card work for smaller amounts; NEFT/RTGS is reliable for large payments but requires the NSDL challan form to be generated first.
10. After payment succeeds, download the challan counterfoil immediately. Record and preserve:
11. BSR code (7-digit bank branch identifier)
12. Challan serial number
13. Date of deposit
14. Amount paid

You will enter these three data points in the advance-tax payment schedule of your ITR. If you misplace the challan, retrieve it from Form 26AS → Part C on the portal or through the NSDL TIN portal using your PAN and payment date.

Do not pay advance tax through a third-party UPI app or wallet that does not generate an ITNS 280 challan. Some apps collect money but fail to apply it to your PAN under the correct AY and minor head. If the credit does not appear on Form 26AS within a few days of payment, raise a rectification request immediately.

Coordinating Advance Tax with TDS: Form 26AS, AIS and TIS

Getting the TDS credit right is as important as paying the right advance-tax amount.

What each statement tells you

• Form 26AS: Tax credit statement on the portal. Shows TDS deducted and deposited against your PAN, advance tax paid, self-assessment tax, refunds issued. Updated as deductors file quarterly TDS returns.
• AIS (Annual Information Statement): Wider coverage — dividends, mutual fund redemptions, ESOP values, sale of immovable property, high-value cash transactions, crypto and foreign remittances. Available under e-File → Income Tax Returns → View AIS.
• TIS (Taxpayer Information Summary): Derived from AIS; shows the system's processed figure for each income category after accounting for your responses to AIS entries. Use TIS as your reconciliation base.

The quarterly reconciliation routine

After each TDS return deadline (the main quarterly dates are 31 July, 31 October, 31 January and 31 May), do the following:

1. Open Form 26AS and download Part A (TDS on salary and non-salary income).
2. Compare against your TDS deduction certificates — Form 16A for non-salary TDS, Form 16 for salary.
3. If a deductor has not filed their return, their TDS will not appear. Contact them in writing with a copy of your deduction evidence. A mismatch at year-end creates a refund hold and the appearance of tax underpayment in an intimation under Section 143(1).
4. Update your advance-tax projection for the next instalment based on what you now know about both income and TDS.
5. If TDS credits are higher than expected, you may be able to reduce the next advance-tax instalment. If lower, top up proactively.

Special Situations That Shift Your Liability Mid-Year

ESOP exercise

ESOP perquisites are taxed as salary income in the year of exercise, not vesting. If you exercise a tranche worth ₹15 lakh in October 2026, your Q3 (December) estimate must include the full perquisite value. Your employer will typically deduct TDS on this in the same month — verify timing with your payroll team so you do not double-count. Startups and unlisted companies sometimes have specific deferral provisions; check whether Section 191 deferral is available to you.

Property sale

Long-term capital gain on the sale of a house property is taxable in the year of registration. If you receive ₹80 lakh from a property sale in November 2026 and the indexed gain is ₹20 lakh, the LTCG tax (at applicable rates) feeds into the December instalment. The 54/54F reinvestment exemption is available if you are investing in another residential property within the prescribed window — factor the net taxable gain (after prospective exemption) into your estimate, not the gross amount.

Arrears of rent

Section 25A taxes arrears of rent in the year of receipt, not the year of accrual. A landlord who receives ₹9 lakh in back rent in August 2026 must include the net rental income (after 30% standard deduction = ₹6.3 lakh) in the September instalment estimate. There is no spreading across prior years for advance-tax purposes.

Common Mistakes and How to Avoid Them

1. Wrong Assessment Year on the challan. Paying FY 2026-27 advance tax with AY 2026-27 (instead of AY 2027-28) creates a credit in the wrong year and a live shortfall in the right one. Fix it immediately through the portal's Challan Correction facility under Services → Challan Correction → Tax Credit.

1. Using last year's tax as a proxy. Last year's liability is a starting point, not an estimate. A promotion, a property sale or a large equity gain can double your liability. Build the projection fresh each year.

1. Ignoring TDS deduction timing. Banks often deduct FD interest TDS at maturity or in March, not quarterly. Do not rely on TDS credits that have not yet materialised when planning mid-year instalments.

1. Treating the ₹10,000 threshold as per-instalment. The threshold applies to the annual net liability. If you owe ₹12,000 for the year, all four dates apply even though each individual payment is less than ₹10,000.

1. Forgetting minor children's clubbed income. Under Section 64(1A), a minor child's income (other than income from manual work or applied skill) is clubbed with the higher-earning parent. If your minor child has FD interest or capital gains, include it in your advance-tax estimate.

1. Paying on 25 March and assuming it covers the 15 March instalment. Payment between 15 March and 31 March counts toward the 100% year-end requirement (avoiding 234B), but Section 234C interest for the 10-day shortfall between 15 March and 25 March still accrues for one month on the unpaid amount.

1. No system for challan storage. A misplaced challan means a disputed TDS credit at the time of filing. Maintain a dedicated folder — a labelled drive or scanned PDF archive — for every advance-tax challan, matched to the instalment date.

Key Takeaways

• Threshold is ₹10,000 of net annual liability after TDS; senior citizens without business income are exempt; presumptive-scheme taxpayers pay in full by 15 March.
• Four instalments are due on 15 June, 15 September, 15 December and 15 March, at cumulative percentages of 15%, 45%, 75% and 100% of estimated annual tax.
• Re-estimate every quarter — capital gains, dividends, ESOPs and irregular receipts can shift your liability significantly between instalments.
• Section 234C charges 1% per month on per-instalment shortfalls; the unanticipated-income carve-out is real but narrow.
• Section 234B charges 1% per month from 1 April 2027 if advance tax paid is less than 90% of assessed tax.
• Use Challan ITNS 280 via e-Pay Tax at incometax.gov.in; always select (100) Advance Tax and AY 2027-28; download and archive the counterfoil immediately.
• Reconcile Form 26AS and AIS after each quarter's TDS return deadline — chasing deductors for timely TDS filing is part of your advance-tax process, not an afterthought.