When it comes to paying taxes in India, most people think about the final tax payment at the end of the financial year. However, the Indian tax system ensures that tax is collected throughout the year through methods like Advance Tax and TDS (Tax Deducted at Source). If you’re confused about how these two work and which one applies to you, this article will make it clear.
What is TDS?
TDS or Tax Deducted at Source is a system where tax is deducted directly from your income at the time of payment. Employers, banks, and other entities deduct a percentage of your earnings and deposit it with the government.
Examples of TDS deductions:
- Salary: Your employer deducts TDS every month before paying your salary.
- Bank Interest: If you earn more than Rs. 40,000 (Rs. 50,000 for senior citizens) in interest from fixed deposits, the bank deducts TDS.
- Rent Payments: If a tenant pays more than Rs. 50,000 per month as rent, they must deduct TDS before transferring rent to the landlord.
- Freelancers and Professionals: If you provide services to a company, they deduct TDS from your payment.
What is Advance Tax?
Advance Tax is also called “pay-as-you-earn” tax because you pay it in installments during the financial year instead of a lump sum at the end. This is mainly applicable to those who have significant income from sources other than salary, such as business profits, rental income, or capital gains.
Who needs to pay Advance Tax?
If your total tax liability for the year is more than Rs. 10,000 after considering TDS, you need to pay Advance Tax. This usually applies to:
- Business owners and self-employed professionals.
- Freelancers and consultants with high earnings.
- Individuals with significant rental income, capital gains, or interest income.
Key Differences Between Advance Tax and TDS
| Feature | TDS | Advance Tax |
|---|---|---|
| Who Deducts? | Payer (employer, bank, client, tenant) | Taxpayer (self) |
| When is it Paid? | Deducted at source and deposited with the government | Paid in installments as per due dates |
| Applicable to | Salaried employees, professionals, fixed deposit holders, etc. | Business owners, self-employed, high-income earners |
| Frequency | Monthly/quarterly | Quarterly |
Advance Tax Payment Due Dates
If you’re liable to pay Advance Tax, you must pay it according to the schedule below:
- 15th June – At least 15% of the total tax due
- 15th September – At least 45% of the total tax due
- 15th December – At least 75% of the total tax due
- 15th March – 100% of the total tax due
Missing these deadlines results in interest penalties under Section 234B and 234C of the Income Tax Act.
How to Check If You Need to Pay Advance Tax
- Calculate your total estimated income for the financial year.
- Deduct eligible exemptions and deductions under Section 80C, 80D, etc.
- Compute your total tax liability using income tax slabs.
- Subtract any TDS already deducted by your employer or other sources.
- If the remaining tax is more than Rs. 10,000, you need to pay Advance Tax.
Which One Affects You More?
- Salaried individuals mostly rely on TDS, and usually don’t have to worry about Advance Tax unless they have additional income.
- Freelancers, business owners, and investors need to track their income and ensure they pay Advance Tax on time to avoid penalties.
Final Thoughts
Understanding the difference between Advance Tax and TDS helps you avoid unnecessary fines and ensures a smoother tax-filing process. If you’re earning from multiple sources, keeping track of your tax liability is essential. Using tax calculators or consulting a CA can help you stay compliant with tax laws.
Disclaimer: This is for informational purposes only and should not be considered financial advice. Consult with a qualified financial advisor before making any investment decisions.
