Let's understand the difference between advance tax and self-assessment tax and how they are calculated

Difference between advance tax and self-assessment tax

If you are confused by personal finance terms, jargon and calculations, here’s a series to simplify and deconstruct these for you. In the 26th part of this series, Riju Mehta explains the difference between the two types of taxes.

What is advance tax?
As the name suggests, it’s a tax that is paid in advance, not at the end of the financial year, on the income received during the year. Also called ‘pay as you earn’ tax, it is paid in four instalments throughout the year as per the dates decided by the Income-tax Department (15% by 15 June; 45% by 15 September, 75% by 15 December, and 100% by 15 March).

Under Section 208 of the Income-tax Act, 1961, advance tax is to be paid by any individual, be it salaried, professional, business, freelancer or self-employed, whose tax liability exceeds Rs.10,000 in a financial year.

How to calculate advance tax?
a. Calculate the gross total income by including salary and additional income from other sources, such as rental income, interest on savings accounts, capital gains, among others.

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b. Subtract any deductions and exemptions (under the old tax regime).
c. Calculate total tax liability.
d. Add health and education cess.
e. Subtract TDS/ TCS.
f. Calculate advance tax to be paid using the formula:
Advance tax=(c+d)-e

Split it into four instalments by calculating 15%, 45%, 75% & 100% of (f).

What is self-assessment tax?
After accounting for advance tax, TDS (tax deducted at source) and TCS (tax collected at source), if there is still some tax to be paid on the income for a given financial year, it is called self-assessment tax. Unlike advance tax, there is no fixed date for depositing this tax, but it has to be paid before filing the income-tax return. If this is not done, it can invite interest on the outstanding tax amount.

Self-assessment tax is paid by those who are obligated to file income-tax returns and it can be done using Challan 280. This is usually paid if you’ve either forgotten an additional source of income, or received unlikely gains, or if there has been any discrepancy in TDS or advance tax calculation.

How to calculate self-assessment tax?
Here’s how you can easily calculate the amount of additional tax that is due.
a. Calculate the tax payable on total income.
b. Add any interest you are liable to pay under Section 234A/ B/ C.
c. Subtract any relief under Section 90/ 90A/ 91.
d. Subtract any MAT credit under Section 115JAA.
e. Subtract the advance tax paid.
f. Subtract any TDS/ TCS.
g. Calculate due tax using the formula:
Self-assessment tax=(a+b)-(c+d+e+f)

This story originally appeared on: India Times - Author:Faqs of Insurances