Advance Tax — also known as “pay-as-you-earn tax” — is the income tax you pay in installments during the same financial year in which the income is earned, instead of paying the entire amount at the end of the year.
Advance tax applies to all assessees — including individuals, HUFs, companies, firms, and professionals — whose estimated tax liability for the financial year is ₹10,000 or more after accounting for TDS (Tax Deducted at Source).
In simple terms, it’s a way for the government to collect taxes periodically while ensuring businesses maintain consistent compliance.
For all assesses, paying advance tax helps:
- Avoid large lump-sum payments at year-end
- Manage cash flow efficiently
- Prevent interest penalties under Sections 234B and 234C
Build a clean tax compliance record — important for loans, tenders, and vendor partnerships
Why SMEs Must Care About Advance Tax
For a small or medium-sized enterprise (SME), tax management directly impacts profitability and liquidity. Paying advance tax ensures that you’re not caught off guard with a big liability during year-end filing.
Key benefits for SMEs:
- Reduces financial strain at the end of the financial year
- Helps plan quarterly cash flow effectively
- Prevents legal and financial penalties
- Boosts business credibility and audit readiness
Who is Liable to Pay Advance Tax
Under Sections 208–219 of the Income Tax Act, 1961, advance tax applies to all assessees whose estimated tax liability for the financial year exceeds ₹10,000 after adjusting for TDS.
This includes a wide range of entities under the SME umbrella such as:
- Proprietorships, Partnerships, LLPs, and Private Limited Companies with taxable income
- Freelancers and consultants operating as independent businesses
- Firms or professionals covered under presumptive taxation (Sections 44AD / 44ADA)
- Businesses earning additional income from sources like rent, capital gains, or interest
In short, any assessee — whether an individual or business entity — is required to pay advance tax if their annual tax payable crosses the ₹10,000 threshold.
Advance Tax Due Dates for FY 2024-25 (AY 2025-26)
| Installment | Due Date | Minimum Cumulative % of Total Tax Payable |
|---|---|---|
| 1st Installment | 15 June 2024 | 15% of total tax liability |
| 2nd Installment | 15 September 2024 | 45% of total tax liability (cumulative) |
| 3rd Installment | 15 December 2024 | 75% of total tax liability (cumulative) |
| 4th Installment | 15 March 2025 | 100% of total tax liability (cumulative) |
For businesses under presumptive taxation (Sections 44AD / 44ADA), 100% of advance tax must be paid in a single instalment by 15 March 2025.
How to Calculate Advance Tax (SME-Specific Formula)
Follow these simple steps to calculate your advance tax liability for FY 2024-25:
- Estimate your total income – include business profits, rental income, capital gains, and other income.
- Deduct exemptions and deductions – such as those under Chapter VI-A (Sections 80C, 80D, etc.).
- Apply applicable tax slab rates – (Company @ 25% if turnover ≤ ₹400 crore, else 30%; Individual under old/new regime rates).
- Add surcharge and cess – (4% health & education cess).
- Subtract TDS/TCS – any tax already deducted or expected to be deducted.
- If net tax liability ≥ ₹10,000, pay it as advance tax per the due dates.
Penalties for Late or Short Payment
Failing to pay advance tax or paying less than required can attract interest under Sections 234B & 234C of the Income Tax Act.
| Section | Trigger | Interest Rate | Details |
|---|---|---|---|
| 234B | If less than 90% of total tax paid by 31 March | 1% per month | Charged on unpaid amount until payment |
| 234C | If instalments are not paid on time | 1% per month | Charged on shortfall for each delayed instalment |
How SMEs Can Plan Better
- Start estimating early: Review your Q1 revenues and expenses by May–June each year.
- Reassess every quarter: Adjust your tax estimate based on actual results.
- Maintain a buffer: Keep at least 10–15% of projected profits aside for tax payments.
- Track TDS credits: Ensure proper reflection in Form 26AS / AIS before computing advance tax.
- Set reminders: Add alerts for 15 June, 15 Sept, 15 Dec, 15 Mar.
- Seek professional review: Have your CA review calculations to avoid misreporting.
- Leverage automation: Use business accounting tools or CA dashboards to auto-estimate tax.
Conclusion
Advance Tax isn’t just a compliance requirement — it’s a financial discipline tool for every SME. Paying tax as you earn helps manage cash flow, avoid penalties, and build a healthy financial reputation.
For FY 2024-25 (AY 2025-26), any SME with over ₹10,000 in net tax liability should follow the quarterly schedule and ensure timely payments.
Pro Tip: Always verify your challan on the Income Tax Portal and reconcile it in your books.
This is a great reminder that financial planning isn’t just about numbers; it’s about aligning your money with your life goals. Physician Lifecycle Planning can help you make the most of your earning potential while ensuring you’re also prioritizing your well-being and quality of life.