Do salaried individuals need to pay advance tax?

Yes, salaried individuals must pay advance tax if their total tax liability exceeds ₹10,000 after adjusting TDS. This applies if they have additional income, such as interest, rental income, or capital gains.

How does TDS apply to freelancers?

Freelancers are subject to TDS on specific income types like professional fees or payments from clients. If TDS is deducted at source, freelancers might still need to pay advance tax if their total tax liability exceeds ₹10,000.

What happens if advance tax is not paid on time?

If advance tax payments are delayed, taxpayers will face a penalty of 1% interest per month on the remaining tax liability under Sections 234B and 234C of the Income Tax Act, 1961.

Can TDS be claimed as a refund?

Yes, if the TDS deducted is more than the actual tax liability, the excess TDS can be claimed as a refund when filing the income tax return.

How is TDS deducted on salary income?

TDS is deducted by the employer from an employee’s salary every month based on the applicable income tax slab rate. The employer then deposits the TDS amount with the government.

What types of income are subject to TDS?

TDS applies to various income sources, such as salary, interest on securities, dividends, rent, professional fees, and payments for contract work.

Can I pay advance tax in a single installment?

No, advance tax must be paid in four installments throughout the financial year: June 15, September 15, December 15, and March 15.

Do senior citizens need to pay advance tax?

Senior citizens are required to pay advance tax only if they have business income. However, they are exempt if they do not have any business income and are only earning salary or pension.

Is there a minimum amount of income for TDS to apply?

Yes, TDS is deducted only if the income exceeds specific threshold limits, which vary depending on the type of income. For example, TDS is deducted on salary when the total salary exceeds the exemption limit.

What if my advance tax payment is less than the required amount?

If the advance tax payment is less than the required amount, interest will be charged under Sections 234B and 234C for the shortfall, as the tax has not been paid in full by the due date.

Can TDS be deducted on income from capital gains?

Yes, TDS can be deducted on income from capital gains, particularly in the case of property sales, where a percentage of the sale amount is deducted at source.

How do I track the TDS deducted from my income?

You can track the TDS deducted from your income through the Form 26AS, which is available on the Income Tax Department’s website. It provides a consolidated statement of all the taxes deducted against your PAN.

Advance Tax vs TDS: Which One Applies to Your Income & When to Pay?

Rajesh Kumar Kar
Apr 2
8 min read

Understanding the difference between Advance Tax and TDS (Tax Deducted at Source) is crucial for managing your tax liabilities. Both are methods of paying tax in India, but they apply under different circumstances and have distinct rules. The question of which one applies to your income depends on various factors such as your income sources and whether or not tax is deducted at the source. Read on to understand how these two tax mechanisms work and when each applies to your income.

What is Advance Tax?

Due Dates for Advance Tax Payment

Penalty for Delay in Advance Tax Payment

What is TDS (Tax Deducted at Source)?

TDS Applicability Based on Income Types

Advance Tax vs TDS: Key Differences

When Does Advance Tax Apply to Your Income?

When Does TDS Apply to Your Income?

Conclusion

Most Asked Questions (FAQs)

What is Advance Tax?

Advance Tax is a system where taxpayers pay their income tax in installments throughout the financial year, instead of making a lump sum payment at the end. This method spreads out the tax liability, helping to ease the financial burden and prevent last-minute tax payments.

Explanation of Advance Tax

Also referred to as "Pay as You Earn," advance tax is applicable to individuals and businesses who receive income beyond their salary. This includes income from freelance work, business profits, rental income, and capital gains. The system ensures that taxes are paid regularly, reducing the likelihood of a large, single payment at year-end.

Who Should Pay Advance Tax?

Advance tax is applicable to anyone whose total tax liability exceeds ₹10,000 during a financial year. This includes:

Salaried individuals with additional income sources (like interest or rent).
Freelancers and self-employed individuals earning from services.
Business owners with income other than salary.
Senior citizens with business income (though those without business income are exempt).

Due Dates for Advance Tax Payment

The payment for advance tax is split into four installments across the year. This approach ensures regular contributions and prevents a significant tax burden at the end of the year.

Installment Breakdown and Deadlines

First Installment (June 15): 15% of the total estimated tax liability
Second Installment (September 15): 45% of the total estimated tax liability
Third Installment (December 15): 75% of the total estimated tax liability
Fourth Installment (March 15): 100% of the total estimated tax liability

These deadlines are essential for all taxpayers who need to pay advance tax, including individuals, freelancers, and businesses. Not meeting these deadlines can lead to penalties.

Penalty for Delay in Advance Tax Payment

Failing to pay advance tax on time or not paying the correct amount can result in penalties and interest charges under Sections 234B and 234C of the Income Tax Act, 1961.

Penalty for Delay: A penalty of 1% interest per month is charged on the outstanding tax liability for each month of delay.
Under Section 234B: If advance tax is not paid or paid less than the required amount, interest is levied on the shortfall from April 1 of the assessment year.
Under Section 234C: If you fail to pay the required installment of advance tax or pay it late, interest is charged on the difference between the due and actual advance tax payment for each installment.

It is important to pay advance tax on time to avoid additional financial burdens through interest and penalties.

What is TDS (Tax Deducted at Source)?

TDS (Tax Deducted at Source) is a method where a certain percentage of income is deducted by the payer before making payment to the recipient. The deducted amount is then deposited directly with the government. Essentially, it acts as a form of advance tax paid on behalf of the taxpayer. TDS helps streamline tax collection, ensuring that the government receives tax revenue regularly throughout the year.

For example, if you receive a salary, the employer deducts TDS from your monthly salary and deposits it with the government. Similarly, if you earn interest on your bank account, the bank may deduct a portion of your interest as TDS.

TDS Applicability Based on Income Types

TDS is applicable to a wide range of income types. The most common ones include:

Salary: TDS is deducted based on the applicable income tax slabs for salaried individuals.
Interest Income: Interest from fixed deposits, savings accounts, or bonds is subject to TDS if it exceeds the prescribed limit.
Rent: Rent paid to landlords may also attract TDS.
Professional Fees: Freelancers and professionals earning fees from clients are subject to TDS on the income received.
Dividends and Securities: Dividends from stocks or mutual funds may also have TDS deducted.

Threshold Limits: TDS is only deducted when the income exceeds specific threshold limits, which differ depending on the type of income. For example, TDS on salary is deducted as per the income tax slab applicable, while TDS on interest may only apply if the amount exceeds ₹40,000 annually for a single account holder.

Advance Tax vs TDS: Key Differences

Here’s a comparison of Advance Tax and TDS to highlight their differences:

Aspect	Advance Tax	TDS
Purpose	To pay tax in installments throughout the year	To deduct tax at the source of income
Eligibility	Individuals with tax liability > ₹10,000	Applicable to specific income types (e.g., salary, rent, interest)
Payment Due Dates	Paid in 4 installments: June 15, Sept 15, Dec 15, March 15	Deducted as income is earned (monthly or annually)
Penalty for Delay	1% interest per month on outstanding liability	No direct penalty for delay, but deductor faces penalties for non-compliance
Applicability	Salaried individuals, freelancers, businesses, and senior citizens with business income	Salaried individuals, professionals, businesses, and others receiving income from specific sources
Calculation	Based on total estimated tax liability	Based on income type and prescribed rates

Both systems are essential tools for ensuring timely and accurate tax collection. However, whether you pay advance tax or have TDS deducted from your income depends on your sources of income and overall tax liabilities.

When Does Advance Tax Apply to Your Income?

Advance Tax is applicable when you expect to earn income that is not subject to TDS or is not fully covered by TDS deductions. If your total tax liability exceeds ₹10,000 in a financial year, you are required to pay advance tax, regardless of whether you are salaried or self-employed.

Advance Tax applies to the following types of income:

Freelancers and Self-Employed Individuals: Income from professional services, consulting, or business activities.
Interest Income: If you earn income from savings accounts, fixed deposits, or bonds that are not subject to TDS or the TDS deducted is insufficient.
Rental Income: Income from property rental not fully covered by TDS.
Capital Gains: Income from the sale of assets, such as shares or property, that is not subject to TDS.
Other Miscellaneous Income: Income from sources like dividends, which might not be covered by TDS or are only partially covered.

The key here is whether your income exceeds the threshold and is not adequately covered by TDS. If that is the case, advance tax must be paid in installments according to the due dates.

When Does TDS Apply to Your Income?

TDS (Tax Deducted at Source) applies to income that is received from specific sources, where the payer (employer, bank, or other institutions) is required to deduct tax before making the payment to the recipient.

TDS applies to the following types of income:

Salary: Employers deduct TDS based on the employee's taxable income and applicable tax slab.
Interest Income: Interest from fixed deposits, savings accounts, and bonds is subject to TDS, provided it exceeds the prescribed threshold.
Rent: TDS is deducted from rental income if it exceeds a certain limit, especially if the rent is paid to a non-residential property owner.
Professional Fees: Payments made to freelancers, consultants, and independent contractors are subject to TDS.
Commission or Brokerage: TDS is applicable on commission payments that exceed the set threshold limit.
Other Payments: Various other payments like dividends, insurance commissions, and payments to contractors are also subject to TDS if they exceed the prescribed limits.

TDS is deducted at the time the income is paid, and the tax is directly deposited with the government. If TDS is deducted from your income, it reduces your tax liability, and you can claim it when filing your income tax return.

Conclusion

The choice between Advance Tax and TDS depends on the nature of your income. Advance Tax applies to those whose income is not fully covered by TDS or where the TDS amount is insufficient to meet their tax liability. It requires taxpayers to pay tax in installments throughout the year. On the other hand, TDS applies to specific types of income where tax is deducted at the source, ensuring that a portion of tax is paid upfront.

Understanding when each of these taxes applies and complying with their deadlines is essential to avoid penalties and ensure a smooth tax filing process. If your income is subject to both, it’s crucial to reconcile the TDS deducted and any advance tax paid to avoid paying excess taxes at the end of the year.

FAQs

Do salaried individuals need to pay advance tax?
Yes, salaried individuals must pay advance tax if their total tax liability exceeds ₹10,000 after adjusting TDS. This applies if they have additional income, such as interest, rental income, or capital gains.
How does TDS apply to freelancers?
Freelancers are subject to TDS on specific income types like professional fees or payments from clients. If TDS is deducted at source, freelancers might still need to pay advance tax if their total tax liability exceeds ₹10,000.
What happens if advance tax is not paid on time?
If advance tax payments are delayed, taxpayers will face a penalty of 1% interest per month on the remaining tax liability under Sections 234B and 234C of the Income Tax Act, 1961.
Can TDS be claimed as a refund?
Yes, if the TDS deducted is more than the actual tax liability, the excess TDS can be claimed as a refund when filing the income tax return.
How is TDS deducted on salary income?
TDS is deducted by the employer from an employee’s salary every month based on the applicable income tax slab rate. The employer then deposits the TDS amount with the government.
What types of income are subject to TDS?
TDS applies to various income sources, such as salary, interest on securities, dividends, rent, professional fees, and payments for contract work.
Can I pay advance tax in a single installment?
No, advance tax must be paid in four installments throughout the financial year: June 15, September 15, December 15, and March 15.
Do senior citizens need to pay advance tax?
Senior citizens are required to pay advance tax only if they have business income. However, they are exempt if they do not have any business income and are only earning salary or pension.
Is there a minimum amount of income for TDS to apply?
Yes, TDS is deducted only if the income exceeds specific threshold limits, which vary depending on the type of income. For example, TDS is deducted on salary when the total salary exceeds the exemption limit.
What if my advance tax payment is less than the required amount?
If the advance tax payment is less than the required amount, interest will be charged under Sections 234B and 234C for the shortfall, as the tax has not been paid in full by the due date.
Can TDS be deducted on income from capital gains?
Yes, TDS can be deducted on income from capital gains, particularly in the case of property sales, where a percentage of the sale amount is deducted at source.
How do I track the TDS deducted from my income?
You can track the TDS deducted from your income through the Form 26AS, which is available on the Income Tax Department’s website. It provides a consolidated statement of all the taxes deducted against your PAN.