Advance Tax
Advance Tax is the income tax payable in instalments during the financial year itself — rather than as a lump sum at the time of filing — mandated under Section 208 of the Income Tax Act when estimated tax liability for the year exceeds ₹10,000.
The principle behind advance tax is 'pay as you earn.' The Income Tax Act requires taxpayers whose total tax liability (after TDS) is likely to exceed ₹10,000 in a financial year to pay tax in four prescribed instalments during the year itself. The due dates and cumulative percentages are: 15% by June 15, 45% by September 15, 75% by December 15, and 100% by March 15.
For equity investors and traders, advance tax becomes relevant when capital gains are realised mid-year and no TDS has been deducted (which is the case for most resident equity investors since TDS on equity capital gains does not apply). An investor who books ₹5 lakh in STCG in August must estimate this liability and pay 45% of the total estimated tax by September 15, or face interest under Sections 234B and 234C.
Section 234B levies interest at 1% per month for failure to pay at least 90% of assessed tax before March 31. Section 234C levies interest at 1% per month for shortfall in each quarterly instalment. These interests can add meaningfully to the total tax outgo, especially for large capital gain events like IPO allotments, block deals, or sale of long-held equity positions.
Senior citizens (aged 60 or above) without business income are exempt from paying advance tax — they may pay all their taxes by the time of filing without attracting Section 234B or 234C interest. This is a significant concession for retired individuals relying primarily on interest, dividend, and capital gains income.
A practical challenge for equity investors is estimating capital gains accurately mid-year, especially since market values are volatile and realised gains are transaction-specific. Tracking realised gains using broker capital gains reports or portfolio management tools quarterly — rather than annually at ITR filing time — is the most effective approach to ensuring advance tax compliance and avoiding penal interest.