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Tax Laws and Practice · Procedural Compliance under Income Tax

Advance Tax and Tax Deduction at Source Explained

Updated 11 October 2026 · Fact-checked

Advance tax is tax you pay during the year, in instalments, on your estimated current income. TDS and TCS are tax deducted or collected at source by the payer or seller. To solve questions, find tax due, reduce it by TDS, check each instalment against its percentage, then apply the interest rate to any shortfall.

Understand Advance Tax and Tax Deduction at Source

The Income-tax Act, 2025 does not wait for assessment to collect tax. Under section 390, tax is payable by deduction or collection at source, by advance payment, or by self-assessment-type payment under section 392(2)(a). This applies even if the income will be assessed in a later tax year.

Advance tax is paid by the assessee in four instalments during the financial year, on current income estimated under section 405. Think of it as paying your tax in four parts, not as one lump sum after the year ends.

TDS (tax deducted at source) means the payer deducts tax from a payment, such as salary or interest, and deposits it with the Central Government. TCS (tax collected at source) means the seller collects tax from the buyer on specified sales. Under section 390(5), the tax deducted, collected or paid is treated as paid on behalf of the person whose income it is, so that person gets credit.

If you pay too little or too late, section 425 charges interest on the shortfall. Any tax still unpaid when you file the return must be paid with interest and fee before filing, as section 266 (self-assessment) requires.

Key rules to remember

Modes of payment (section 390)
Tax = deduction/collection at source + advance payment + payment under section 392(2)(a)
Applies irrespective of the fact that assessment is made in a later tax year.
Advance tax instalments (section 408(1))
15 June: not less than 15% | 15 September: not less than 45% | 15 December: not less than 75% | 15 March: 100%
Each figure is cumulative. Reduce it by amounts already paid in earlier instalments.
Presumptive assessees (section 408(2))
Whole advance tax on or before 15 March
Applies to an assessee declaring profits under section 58(2) (Table: Sl. No. 1 or 3).
Tax paid up to 31 March (section 408(3))
Advance tax paid on or before 31 March counts for the financial year ending that day
Use it to place a late-March payment in the correct year.
Interest on deferment (section 425(1))
Interest = shortfall × 3% (June, September, December instalments); shortfall × 1% (March instalment)
Shortfall = required cumulative percentage of tax due on returned income, minus advance tax paid by that date.
Safe harbour (section 425(2))
No interest if paid by 15 June ≥ 12% and by 15 September ≥ 36% of tax due on returned income
The relief covers only the June and September instalments.
Presumptive assessee interest (section 425(3))
Simple interest = 1% × (tax due on returned income − advance tax paid by 15 March)
For assessees under section 58(2) (Sl. No. 1 or 3), or where advance tax paid by 15 March falls short.
Tax due on returned income (section 425(5))
Tax on total income declared in the return − TDS/TCS on income included − reliefs under sections 157, 159(1), 159(2), 160 − specified tax credits
Always deduct TDS/TCS before applying the percentages.
No interest on unforeseen income (section 425(4))
No interest on shortfall caused by under-estimating capital gains, section 2(49)(n) income, first-time business income or dividend, if the tax is paid in later instalments or by 31 March
Both conditions must be met: the shortfall arises from that income, and the tax on it is paid in full later.
Self-assessment tax (section 266(1))
Balance tax + interest + fee, paid before filing the return
The return must carry proof of payment.
Order of adjustment (section 266(3))
Short payment is adjusted first to fee, then interest, then tax
Shows why a short payment can leave tax itself unpaid.

How to solve Advance Tax and Tax Deduction at Source questions

Use this sequence for any numerical or theory question on advance tax and interest.

  1. 1Identify the assessee type. A presumptive assessee under section 58(2) (Sl. No. 1 or 3) pays the whole advance tax by 15 March. Others pay in four instalments.
  2. 2Compute the tax due on returned income and reduce it by TDS, TCS, and the reliefs listed in section 425(5).
  3. 3Work out the required cumulative amount at each date: 15%, 45%, 75% and 100% of that tax due.
  4. 4List the advance tax actually paid by each date, cumulatively.
  5. 5Apply the safe harbour: if June payment is at least 12% and September payment is at least 36%, no interest for those instalments.
  6. 6For each date with a shortfall, multiply the shortfall by 3% (June, September, December) or 1% (March). For presumptive assessees use 1% on the March shortfall.
  7. 7Check section 425(4): if the shortfall arises from capital gains, dividend or the other listed items, and tax was paid in later instalments, drop the interest.
  8. 8Conclude: state the interest, the section, and that any balance is paid as self-assessment tax under section 266 before filing.

Quickest way: Four-line instalment grid

When to use it: Use for numerical questions with several payment dates and a tax figure already given.

  1. Write four rows: 15 June, 15 September, 15 December, 15 March.
  2. Beside each row write the required amount (15%, 45%, 75%, 100% of tax due after TDS) and the cumulative amount paid.
  3. Mark the safe harbour test (12% and 36%) for the first two rows before computing anything.
  4. Multiply each shortfall by its rate (3%, 3%, 3%, 1%) and add the four results.

Common mistakes in Advance Tax and Tax Deduction at Source

  • Applying the percentages to total tax instead of tax after TDS and credits

    Students forget that section 425(5) defines tax due on returned income net of TDS, TCS and reliefs.

    Fix: Always subtract TDS, TCS and listed reliefs first, then take 15%, 45%, 75% and 100%.

  • Treating instalment percentages as separate payments

    The table reads like 15%, then 30% more, and so on.

    Fix: The percentages are cumulative. Reduce each by the amount paid earlier.

  • Using 3% for the March instalment

    Students remember 3% and apply it to all four rows.

    Fix: Use 3% for June, September and December shortfalls, and 1% for March.

  • Ignoring the 12% and 36% safe harbour

    Students compute interest straight from the 15% and 45% required figures.

    Fix: If the cumulative payment meets 12% by June or 36% by September, there is no interest for that instalment, even if it is below 15% or 45%.

  • Mixing up TDS and TCS

    Both are collected at source and credited to the person concerned.

    Fix: TDS is deducted from a payment made to someone. TCS is collected by a seller from a buyer. In both cases the credit goes to the person whose income or purchase it relates to.

  • Quoting TDS rates from memory without the payment type

    Rates differ by nature of payment and payee.

    Fix: In theory answers, state the framework in section 390 and Chapter XIX-B. Quote a rate only when you are sure of it for that payment.

Worked examples

Example 1

Rahul Mehta, a resident individual not covered by section 58(2), has tax due on returned income (after TDS) of ₹4,00,000. He paid cumulative advance tax of ₹30,000 by 15 June, ₹1,20,000 by 15 September, ₹3,00,000 by 15 December and ₹4,00,000 by 15 March. Compute interest under section 425.

Show the solution
  1. 15 June: required 15% of ₹4,00,000 = ₹60,000. Safe harbour 12% = ₹48,000. Paid ₹30,000 is less than ₹48,000, so interest applies. Shortfall = ₹60,000 − ₹30,000 = ₹30,000. Interest = ₹30,000 × 3% = ₹900.
  2. 15 September: required 45% = ₹1,80,000. Safe harbour 36% = ₹1,44,000. Paid ₹1,20,000 is less than ₹1,44,000, so interest applies. Shortfall = ₹1,80,000 − ₹1,20,000 = ₹60,000. Interest = ₹60,000 × 3% = ₹1,800.
  3. 15 December: required 75% = ₹3,00,000. Paid ₹3,00,000. No shortfall, no interest.
  4. 15 March: required 100% = ₹4,00,000. Paid ₹4,00,000. No shortfall, no interest.
  5. Total interest = ₹900 + ₹1,800 = ₹2,700.

Answer: Interest under section 425(1) is ₹2,700, payable with any self-assessment tax before the return is filed (section 266).

Example 2

Meera, a presumptive assessee declaring profits under section 58(2) (Sl. No. 1 or 3), has tax due on returned income of ₹2,00,000. She paid ₹1,50,000 by 15 March and nothing earlier. State the advance tax due date and compute the interest.

Show the solution
  1. Under section 408(2), a presumptive assessee pays the whole advance tax on or before 15 March. Her due date is therefore 15 March, not four instalments.
  2. Under section 425(3), simple interest at 1% applies on the shortfall from the tax due on returned income.
  3. Shortfall = ₹2,00,000 − ₹1,50,000 = ₹50,000.
  4. Interest = ₹50,000 × 1% = ₹500.
  5. The tax shortfall and interest must be paid as self-assessment under section 266 before she files the return, with proof of payment.

Answer: Interest is ₹500 under section 425(3). No instalment-wise interest at 3% arises for her.

Exam tips

  • Write the section number with each rule: 390 for modes, 408 for instalments, 425 for interest, 266 for self-assessment. Examiners reward the provision, then facts, then conclusion.
  • In numerical answers, show tax due after TDS before any percentage. Marks usually go to this step.
  • Always show the cumulative required amount, amount paid and shortfall for each date in a small list so partial marks are easy to award.
  • Mention the presumptive assessee exception whenever the facts hint at section 58(2). It changes both the due date and the interest rate.
  • Use only Income-tax Act, 2025 section numbers for June 2027. Do not cite the old Act's sections except to contrast them.

Practice questions from Procedural Compliance under Income Tax

Advance Tax and Tax Deduction at Source in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Advance Tax and Tax Deduction at Source: frequently asked questions

What are the advance tax due dates and instalments?

Under section 408(1), the dates are 15 June, 15 September, 15 December and 15 March. The cumulative amounts payable are not less than 15%, 45%, 75% and 100% of the advance tax. A presumptive assessee under section 58(2) (Sl. No. 1 or 3) pays the whole by 15 March.

What is the interest for non-payment of advance tax?

Under section 425(1), interest is 3% on the shortfall for the June, September and December instalments and 1% on the shortfall for the March instalment. No interest applies if you paid at least 12% by 15 June and at least 36% by 15 September. Presumptive assessees pay 1% simple interest on the shortfall at 15 March.

What is the difference between TDS and TCS?

TDS is tax deducted by the payer from a payment, such as salary or interest. TCS is tax collected by the seller from the buyer on specified sales. Both are paid to the Central Government and, under section 390(5), treated as tax paid on behalf of the person concerned.

How do I calculate advance tax liability?

Estimate your current income, compute tax on it, and reduce it by expected TDS, TCS and the reliefs the Act allows. Pay that balance in instalments by the due dates. For interest, section 425(5) defines the base as tax on the returned income after those reductions.

Where do I find TDS rates for the exam?

The framework sits in section 390 and the deduction provisions of Chapter XIX-B. Rates differ by type of payment, so learn them from your ICSI study material for the June 2027 session. Quote a rate only for the payment named in the question.