What Is Advance Tax and Who Must Pay It
Advance tax is India's pay-as-you-earn income tax mechanism. Instead of paying the entire year's tax liability in a lump sum after the financial year ends, taxpayers must estimate their annual income and pay tax in four quarterly instalments during the financial year itself. The system is governed by Sections 208 to 211 of the Income Tax Act, 1961.
Every taxpayer — individual, partnership, LLP, or company — whose estimated tax liability for the financial year exceeds INR 10,000 after deducting TDS/TCS must pay advance tax. For foreign companies operating in India through a wholly owned subsidiary or branch office, this is a particularly important obligation because India's financial year (April to March) often misaligns with the parent company's fiscal calendar.
Senior citizens (aged 60 or above) who are resident Indians and do not have income from business or profession are exempt from advance tax. However, this exemption does not apply to foreign companies or their Indian subsidiaries regardless of the age of directors.
The Four Quarterly Deadlines for FY 2026-27
The advance tax schedule for FY 2026-27 (Assessment Year 2026-27) follows a cumulative payment structure. Each instalment represents a cumulative percentage of the total estimated tax liability for the year:
| Instalment | Due Date | Cumulative % of Tax Liability | Incremental Payment |
|---|---|---|---|
| First | June 15, 2026 | 15% | 15% of estimated annual tax |
| Second | September 15, 2026 | 45% | 30% of estimated annual tax |
| Third | December 15, 2026 | 75% | 30% of estimated annual tax |
| Fourth | March 15, 2027 | 100% | 25% of estimated annual tax |
These are hard deadlines. If any due date falls on a Sunday or public holiday, the payment must be made on the last working day before the due date. There is no extension mechanism for advance tax — unlike income tax return filing, the government does not push these dates forward.
How the Cumulative System Works
The percentages are cumulative, not standalone. By September 15, you must have paid at least 45% of your estimated annual tax — not just 30%. If you paid only 10% in the first instalment (instead of 15%), you need to pay 35% in the second instalment to reach the 45% cumulative threshold.
This means the third quarter (October to December) is critical for recalibration. By December 15, companies should have a reasonably accurate picture of their full-year income. Any under-estimation in earlier quarters must be corrected with a larger third-instalment payment to reach the 75% cumulative mark.
How to Calculate Advance Tax for Foreign Companies
Foreign companies and their Indian subsidiaries face specific tax rate considerations that affect the advance tax calculation.
Corporate Tax Rates for FY 2026-27
The base corporate tax rate depends on the type of entity:
| Entity Type | Base Rate | Surcharge | Cess (4%) | Effective Rate |
|---|---|---|---|---|
| Domestic company (Section 115BAA) | 22% | 10% | 4% | 25.17% |
| Domestic company (Section 115BAB — new manufacturing) | 15% | 10% | 4% | 17.16% |
| Domestic company (standard, turnover up to INR 400 crore) | 25% | 7%/12% | 4% | 27.82% to 29.12% |
| Foreign company (income up to INR 1 crore) | 35% | 0% | 4% | 36.40% |
| Foreign company (income INR 1-10 crore) | 35% | 2% | 4% | 37.13% |
| Foreign company (income above INR 10 crore) | 35% | 5% | 4% | 38.22% |
*Section 115BAB closed to new applicants after 31 March 2024. Only grandfathered companies continue to claim this rate.*
Step-by-Step Calculation
- Estimate total income for FY 2026-27 from all sources: business profits, capital gains, interest income, rental income, and other sources.
- Compute gross tax liability by applying the applicable corporate tax rate, surcharge, and 4% Health and Education Cess.
- Deduct TDS/TCS credits that are expected to be deducted during the year — TDS on payments received, TCS on purchases, and any withholding tax applied on cross-border receipts.
- Deduct MAT credit if applicable — companies that paid Minimum Alternate Tax in prior years may have accumulated MAT credit that can offset current year liability.
- The residual amount is the advance tax payable if it exceeds INR 10,000.
Presumptive Taxation: Different Rules Apply
Companies and individuals opting for presumptive taxation under Sections 44AD or 44ADA follow a simplified advance tax schedule. Instead of four quarterly instalments, the entire advance tax liability must be paid in a single instalment by March 15 of the financial year.
Under Section 44AD, businesses with turnover up to INR 2 crore (or INR 3 crore if digital receipts exceed 95%) can declare 8% of turnover (6% for digital receipts) as presumptive income. Under Section 44ADA, professionals with gross receipts up to INR 75 lakh can declare 50% of gross receipts as presumptive income.
Foreign companies operating through a permanent establishment in India may also have presumptive taxation provisions apply — for instance, shipping companies are taxed at 7.5% of freight earned in India under Section 44B, and companies in the oil exploration business are taxed under Section 44BB.
Interest Under Section 234B: Non-Payment of Advance Tax
If you fail to pay advance tax or if the advance tax paid is less than 90% of the assessed tax, interest under Section 234B applies at 1% per month (or part of a month) on the shortfall amount.
The interest calculation period runs from April 1 of the assessment year (the year after the financial year) to the date of actual payment or the date of regular assessment, whichever is earlier.
Example: If your total tax liability for FY 2026-27 is INR 50,00,000 and you paid zero advance tax, 234B interest applies on the full INR 50,00,000 at 1% per month from April 1, 2026, until payment. If you file your return and pay the balance on July 31, 2026 (4 months), the 234B interest would be INR 2,00,000 (4 x 1% x INR 50,00,000).
Interest Under Section 234C: Deferment of Advance Tax
Section 234C applies when you pay advance tax but not on time — you defer the instalments. Even if you eventually pay the full tax, deferring any instalment triggers 234C interest at 1% per month on the shortfall for each quarter.
How Section 234C Interest Is Calculated
| Instalment | If Paid Less Than | Interest Period | Calculated On |
|---|---|---|---|
| June 15 | 12% of tax | 3 months | Shortfall below 15% |
| September 15 | 36% of tax | 3 months | Shortfall below 45% |
| December 15 | 75% of tax | 3 months | Shortfall below 75% |
| March 15 | 100% of tax | 1 month | Shortfall below 100% |
Note the asymmetry: for the first three instalments, the interest runs for 3 months each. For the fourth instalment, it runs for only 1 month. Also note that the first instalment has a 12% floor (not 15%) — the Income Tax Act provides a 3% tolerance for the first quarter only.
Critical point for foreign subsidiaries: Interest under Section 234B and 234C is not deductible as a business expense. It is a dead cost. For foreign-owned companies that may be used to deducting interest on late tax payments in their home jurisdiction, this is an unwelcome surprise.
How to Pay Advance Tax Online
Advance tax is paid through the Income Tax Department's e-Pay Tax facility on the e-filing portal (incometax.gov.in). The process involves:
- Log in to the e-Filing portal with your PAN/Permanent Account Number and password.
- Navigate to e-File and select e-Pay Tax.
- Select Challan type — for advance tax, choose the Income Tax (other than companies) or Corporation Tax option as applicable, with the payment type set to "Advance Tax (100)."
- Enter the assessment year — for FY 2026-27 payments, the assessment year is 2026-27.
- Choose payment mode — net banking, debit card, UPI, or payment gateway through authorized banks.
- Download receipt — the challan receipt (CRN) contains the BSR code, date, and serial number needed to claim credit in your ITR.
The company's Digital Signature Certificate is not required for advance tax payment itself, but it is needed for the related income tax return filing.
Special Considerations for Foreign-Owned Companies
Foreign companies and their Indian subsidiaries face several unique challenges with advance tax:
Fiscal Year Mismatch
Most foreign parent companies follow a January-December or October-September fiscal year. India's April-March financial year means the first advance tax instalment (June 15) falls barely 2.5 months into the Indian financial year, when many subsidiaries are still finalizing the previous year's accounts. Estimating current-year income at this stage requires significant forecasting effort.
Transfer Pricing Adjustments
Transfer pricing adjustments can materially alter a subsidiary's taxable income. If the transfer pricing study for the current year has not been completed, the advance tax estimate may be significantly off. Companies should use the prior year's transfer pricing margins as a starting baseline and adjust for known changes in intercompany transactions.
DTAA Credits and Withholding
Foreign companies receiving income from India (royalties, fees for technical services, dividends) need to factor in DTAA treaty rates when estimating advance tax. If the Indian payer is already deducting withholding tax at the treaty rate, the foreign company's advance tax liability may be reduced or eliminated after TDS credits.
MAT Considerations
Companies opting for the standard tax regime (not Section 115BAA) must also compute their Minimum Alternate Tax liability at 15% of book profits. The advance tax should be based on whichever is higher — the regular tax or MAT computation. This dual-track calculation adds complexity for foreign-owned subsidiaries that must report book profits under both Indian accounting standards and the parent company's GAAP.
Common Mistakes Foreign Companies Make
- Using the parent's fiscal year for estimation: India's financial year is April to March. Advance tax instalments must align with this calendar, not the parent company's January-December cycle.
- Ignoring advance tax in loss-making years: Even if the subsidiary is operationally loss-making, it may have capital gains, interest income, or other taxable income that pushes the liability above INR 10,000.
- Not adjusting for Form 15CA/15CB remittances: Outward remittances may trigger TDS obligations that affect the net tax position. These must be factored into the advance tax calculation.
- Paying too late on the due date: Payment must be credited by the due date, not just initiated. Bank processing can take 1-2 business days. Initiate payments at least 3 days before each deadline.
- Failing to revise estimates quarterly: Many companies set one estimate in June and pay the same amount each quarter. Revenue fluctuations, one-time transactions, and capital gains all require quarterly re-estimation.
Key Takeaways
- Advance tax is due in four instalments: 15% by June 15, 45% by September 15, 75% by December 15, and 100% by March 15 — all hard deadlines with no extensions.
- Interest under Section 234B (1% per month on total shortfall) and Section 234C (1% per month per quarter) are automatic and non-deductible as business expenses.
- Foreign companies in India face a 35% base tax rate plus surcharge and 4% cess, with an effective rate of 36.40% to 38.22% depending on income level.
- Presumptive taxation allows a single March 15 payment instead of quarterly instalments — relevant for certain foreign company activities like shipping and oil exploration.
- Start each quarter's estimation process at least 15 days before the due date, and initiate payment at least 3 days before to ensure timely credit. Engage your tax advisory team for accurate quarterly projections.
Frequently Asked Questions
What happens if I miss the advance tax deadline by one day?
Even a one-day delay triggers Section 234C interest at 1% per month on the shortfall amount. For the first three quarters, this means 3 months of interest. There is no grace period — the due dates are absolute.
Can a foreign company claim advance tax credit against its home country taxes?
Yes, most DTAA treaties provide for foreign tax credit. Advance tax paid in India can typically be claimed as a credit against the parent company's home country tax liability, subject to the treaty provisions and the home country's foreign tax credit rules.
Is advance tax applicable to a startup with no revenue in the first year?
If the startup's total tax liability after TDS deduction is less than INR 10,000 for the financial year, advance tax is not required. However, even pre-revenue startups may have interest income on initial capital that creates a small tax liability.
What is the difference between Section 234B and Section 234C interest?
Section 234B applies when total advance tax paid is less than 90% of assessed tax — it charges 1% per month from April 1 of the assessment year until payment. Section 234C applies to quarterly shortfalls — it charges 1% per month for 3 months for each quarter where the cumulative payment falls short.
Can I pay more advance tax than the schedule requires to avoid future interest?
Yes, you can front-load advance tax payments. Paying more than the required percentage in earlier quarters is permissible and eliminates Section 234C risk. Any excess payment is adjusted against subsequent instalments or refunded after ITR processing.
Do I need to file any form when paying advance tax?
No separate form is filed. Advance tax is paid through the e-Pay Tax facility on incometax.gov.in by creating a challan. The payment is automatically linked to your PAN and reflected in Form 26AS and your Annual Information Statement (AIS).
How does advance tax work for companies under presumptive taxation?
Companies and individuals under presumptive taxation (Section 44AD or 44ADA) pay the entire advance tax in a single instalment by March 15. They do not need to follow the quarterly schedule. Certain foreign company activities like shipping (Section 44B) and oil exploration (Section 44BB) also follow presumptive taxation rules.