4. Advance Tax Contribution
Advance tax refers to the income tax paid in several installments throughout the financial year rather than as a single lump sum after the year ends. The rules governing advance tax can be found in sections 207 to 219 of the Income Tax Act.
At the start of the financial year, the taxpayer estimates their total income, which helps them determine their tax liability. Advance tax payments are made in specified percentages across four installments, with due dates set by the Income Tax Department.
When is advance tax applicable?
As per the tax regulations outlined in Section 208, if your net tax liability for the year is ₹10,000 or more, you are required to pay advance tax. However, there is an exemption for senior citizens aged 60 and above who do not have income from business or professional activities.
For the financial year 2025-26, the advance tax is to be paid in four installments:
- 15th June 2025: 15% of estimated tax liability
- 15th September 2025: 45% of estimated tax liability
- 15th December 2025: 75% of estimated tax liability
- 15th March 2026: 100% of estimated tax liability
Misconceptions about advance tax
Salaried individuals don’t need to pay advance tax
Salary TDS covers only salary income. If you earn from capital gains, F&O, dividends, rental income, or other sources, you may still need to pay advance tax.
Traders can pay everything at year-end
F&O and intraday income are treated as business income. Business income must follow the quarterly advance tax schedule. Paying the entire amount later leads to interest charges.
Businesses can pay the full amount on 15 March
This applies only to those under the presumptive taxation scheme. Others must follow the quarterly installments.
For F&O and intraday traders
F&O profits are classified as non-speculative business income, while intraday equity profits are categorized as speculative business income; both are considered part of your business income. It’s important to estimate your annual profits and make advance tax payments based on the installment schedule. In case you overpay or finish the year with a loss, any excess amount will be refunded to you once you file your tax return.
For equity investors
Capital gains operate a bit differently than you might expect. The law understands that predicting when gains will happen can be tricky. If you realize gains after an installment due date and settle the tax through the remaining installments (or by 31 March), you won’t incur interest under Section 234C for any earlier shortfall.
In practice, this means you pay advance tax on capital gains when you actually book them.
Example:
- If you earn no gains in A and B but realise ₹2,00,000 of gains in C, you pay 75% of the tax on those gains by 15 December 2025.
- If you realise another ₹1,00,000 in D, you compute tax on the total ₹3,00,000 and reduce what you already paid in December.
Current tax rates for capital gains
As per the Current Union Budget, here are the applicable tax rates for equity investments:
Long-term Capital Gains (LTCG):
- Holding period: More than 12 months
- Tax rate: 12.5% (without indexation benefit)
- Exemption: Up to ₹1.25 lakh per financial year
Short-term Capital Gains (STCG):
- Holding period: 12 months or less
- Tax rate: 20%
The above rates are only for equity. To learn how debt instruments are taxed, check out this Varsity article.
How to calculate your advance tax liability
- Estimate your total income: Include your salary, business income (such as F&O and intraday), realised capital gains, dividends, interest, and any other taxable income.
- Subtract eligible deductions: Subtract deductions such as Section 80C, 80D, and others if you follow the old tax regime, or deductions available under the applicable sections in the new tax regime.
- Compute your tax: Apply the correct income-tax slab rates and special rates for capital gains such as LTCG and STCG, based on the regime you have chosen.
- Check if your tax liability after TDS/TCS exceeds ₹10,000: Advance tax becomes mandatory only if your total tax payable after adjusting TDS and TCS is more than ₹10,000.
- Pay advance tax on the remaining amount: Subtract TDS/TCS already paid, and pay advance tax on the balance as per the installment schedule.
