Advance Tax vs Self-Assessment Tax: Know the Difference and How to Calculate

November 25, 2024 By: Shalini Bhardwaj

Paying income tax is a responsibility of every taxpayer earning above a certain limit. While most people are aware of income tax filing, many remain confused about terms like advance tax and self-assessment tax. These are critical components of tax payment under Indian laws and must be understood clearly to avoid penalties and ensure smooth compliance.

Here’s a detailed look at these two taxes, their differences, and how to calculate them.

What is Advance Tax?

Advance tax is a tax payment made during the financial year on the income you earn within that year. Instead of paying your entire tax at the end of the financial year, you pay it in installments spread across the year.

It follows the “Pay as You Earn” principle, ensuring that taxpayers contribute to their tax obligations progressively.

Who Needs to Pay Advance Tax?

Under Section 208 of the Income Tax Act, 1961, anyone with a tax liability exceeding ₹10,000 in a financial year must pay advance tax. This applies to:

• Salaried employees
• Professionals like doctors, lawyers, and consultants
• Business owners
• Freelancers and self-employed individuals

Schedule for Advance Tax Payments

The Income Tax Department mandates advance tax to be paid in four installments. Here’s how it works:

• 15% of the total tax liability by June 15
• 45% of the total tax liability by September 15
• 75% of the total tax liability by December 15
• 100% of the total tax liability by March 15

Timely payments prevent penalties and ensure compliance with tax rules.

How to Calculate Advance Tax

Follow these steps to calculate your advance tax:

1. Calculate Total Income
   Combine all sources of income, including:
   • Salary
   • Rental income
   • Interest income from savings accounts or fixed deposits
   • Capital gains (from selling property, stocks, etc.)
2. Deduct Deductions and Exemptions
   Use applicable deductions like under Section 80C (e.g., insurance, PPF) or exemptions (e.g., HRA).
3. Determine Total Tax Liability
   Apply the relevant income tax slab to your net taxable income.
4. Add Health and Education Cess
   Include the mandatory 4% cess on the calculated tax.
5. Deduct TDS/TCS
   Subtract any tax already deducted at source (TDS) or collected at source (TCS).
6. Calculate Payable Advance Tax
   Use the formula:
   Advance Tax = (Total Tax + Cess) – TDS/TCS
7. Split into Installments
   Divide your payable tax into installments as per the prescribed percentages.

What is Self-Assessment Tax?

Self-assessment tax is the balance tax paid after accounting for advance tax and TDS/TCS. It ensures you clear any remaining tax liability before filing your income tax return (ITR). Unlike advance tax, self-assessment tax has no fixed due dates but must be paid before filing your ITR to avoid interest charges.

Who Needs to Pay Self-Assessment Tax?

Anyone who owes additional tax after calculating total income, TDS, and advance tax payments must pay self-assessment tax. Common scenarios include:

• Income from unexpected sources like gifts, awards, or bonuses
• Gains from the sale of property or investments
• Errors in previous tax calculations

How to Calculate Self-Assessment Tax

Here’s a step-by-step guide to calculating self-assessment tax:

1. Determine Total Tax Payable
   Calculate the tax on your total income, including any income not covered by advance tax or TDS.
2. Add Interest Under Section 234
   If applicable, include interest for late payment under:
   • Section 234A: Delay in filing ITR
   • Section 234B: Delay in paying advance tax
   • Section 234C: Shortfall in advance tax installments
3. Deduct Relief Under Section 90/90A/91
   Subtract any tax relief claimed under applicable sections for foreign income or double taxation.
4. Account for MAT Credit
   Deduct any Minimum Alternate Tax (MAT) credit you may be eligible for under Section 115JAA.
5. Subtract Advance Tax Paid
   Deduct all advance tax payments made during the financial year.
6. Deduct TDS/TCS
   Subtract any TDS or TCS credited to your PAN.
7. Calculate Payable Tax
   Use the formula:
   Self-Assessment Tax = (Tax Payable + Interest) – (Relief + MAT Credit + Advance Tax + TDS/TCS)

Key Differences Between Advance Tax and Self-Assessment Tax

Parameter	Advance Tax	Self-Assessment Tax
When to Pay	Paid during the financial year	Paid before filing income tax return
Applicability	For individuals with tax liability >₹10,000	For those with remaining tax liabilities
Installments	Paid in four installments	Paid as a single lump sum
Interest for Delay	Interest under Section 234C	Interest under Section 234A/B
Calculation	Based on estimated annual income	Based on actual income and deductions

Common Mistakes to Avoid

1. Ignoring Interest Liabilities: Not accounting for interest under Section 234 can lead to penalties.
2. Overlooking Additional Income: Always include all sources of income, even one-time or unexpected gains.
3. Incorrect TDS Calculation: Ensure the TDS figures match your Form 26AS to avoid discrepancies.
4. Delaying Payments: Both advance tax and self-assessment tax must be paid on time to avoid interest and penalties.

By understanding these taxes and their calculations, you can plan your finances better and stay compliant with income tax laws.