Advance Tax for Foreign-Owned Companies: Deadlines & Calculation

Understanding Advance Tax for Foreign-Owned Companies

This article is part of our Complete Tax Guide for Foreign Companies in India. Here we dive deep into advance tax obligations, calculation methodology, and the penalty framework.

Advance tax is essentially a pay-as-you-earn mechanism under the Indian Income Tax Act. Instead of paying the entire year's tax liability after the financial year ends, companies must estimate their income and pay tax in quarterly instalments during the year itself. For foreign-owned companies operating in India — whether through a wholly owned subsidiary, a branch office, or a structure that creates a permanent establishment — advance tax is not optional. Any company whose estimated tax liability for the year exceeds INR 10,000 (after adjusting for TDS credits) must pay advance tax.

The challenge for foreign-owned companies is unique. Revenue projections often depend on intercompany transactions, transfer pricing adjustments, and currency fluctuations — none of which are easy to estimate at the start of the financial year. Yet the penalty for underpayment is mechanical: 1% per month interest, calculated without discretion.

Advance Tax Payment Schedule for FY 2026-27

The advance tax schedule for all companies, including foreign-owned subsidiaries and branches, follows four fixed deadlines during the financial year (April 1, 2026 to March 31, 2027).

Key Points About the Schedule

• The percentages are cumulative. By September 15, you must have paid at least 45% of the full year's estimated tax — not 45% of the quarter's income.
• If a due date falls on a Sunday or public holiday, payment on the next working day is accepted without penalty.
• Advance tax can be paid through the Income Tax portal using Challan No. 280 (ITNS 280), selecting the advance tax payment type.
• Payments made after the due date but before the next instalment are credited against the current instalment but attract Section 234C interest for the delay.

Step-by-Step Calculation for Foreign-Owned Subsidiaries

The calculation methodology differs depending on whether your Indian entity is a domestic company (subsidiary) or a foreign company (branch/PE).

Step 1: Estimate Total Income

Start with the projected profit before tax for FY 2026-27. For a foreign-owned Indian subsidiary, this includes:

• Revenue from operations (goods and services sold in India and exports)
• Other income (interest, dividends received from Indian investments, capital gains)
• Intercompany income (management fees received, if applicable)
• Less: All deductible expenses, including intercompany charges paid (management fees, royalties, technical service fees) — provided these are at arm's length prices

Step 2: Apply the Correct Tax Rate

The applicable corporate tax rate depends on the entity type and regime elected.

*Surcharge for domestic companies under the old regime: 7% if income exceeds INR 1 crore; 12% if income exceeds INR 10 crore. Marginal relief applies to prevent the surcharge from exceeding the incremental income.

Step 3: Check Minimum Alternate Tax (MAT)

Even if your company shows a loss or minimal profit under normal provisions, MAT may apply. MAT is calculated at 15% of book profits (as per the profit and loss account prepared under the Companies Act) plus applicable surcharge and cess.

MAT provisions apply to Indian subsidiaries of foreign companies. However, MAT does not apply to foreign companies that do not have a permanent establishment in India or are not required to be registered under the Companies Act.

If MAT exceeds the normal tax liability, the company pays MAT. The excess of MAT over normal tax can be carried forward as MAT credit for up to 15 years and set off against future tax liabilities where normal tax exceeds MAT.

Step 4: Deduct TDS Credits

Subtract the TDS already deducted on the company's income during the year. Common TDS credits for foreign-owned subsidiaries include:

• TDS on interest income from banks (Section 194A — 10%)
• TDS on payments received from clients (Section 194J for professional fees — 10%, Section 194C for contracts — 1-2%)
• TDS on rent received (Section 194-I — 10%)

The net amount after deducting TDS credits is your advance tax liability.

Step 5: Calculate Each Instalment

Apply the instalment percentages to your net advance tax liability.

Example: A foreign-owned subsidiary with estimated taxable income of INR 5 crore under Section 115BAA:

• Tax at 22%: INR 1,10,00,000
• Surcharge at 10%: INR 11,00,000
• Subtotal: INR 1,21,00,000
• Cess at 4%: INR 4,84,000
• Total tax: INR 1,25,84,000
• Less: Estimated TDS credits: INR 15,00,000
• Net advance tax liability: INR 1,10,84,000

Interest Penalties: Section 234B and 234C

The penalty framework for advance tax defaults is strict and automatic — there is no discretionary waiver.

Section 234C: Interest on Instalment Shortfall

If the advance tax paid by any instalment due date is less than the prescribed cumulative percentage, interest at 1% per month (or part of a month) is charged on the shortfall for a period of three months.

Example: If your company should have paid INR 49,87,800 by September 15 (45% of liability) but only paid INR 30,00,000, the shortfall is INR 19,87,800. Interest under 234C = INR 19,87,800 x 1% x 3 months = INR 59,634.

Section 234B: Interest on Total Default

If the total advance tax paid during the year is less than 90% of the assessed tax liability, Section 234B applies. Interest is charged at 1% per month from April 1 of the assessment year until the date of actual payment (typically the return filing date).

Example: If assessed tax is INR 1,10,84,000 and the company paid only INR 90,00,000 in advance tax (81.2% — below the 90% threshold), interest under 234B applies on the shortfall of INR 20,84,000 from April 1, 2027 (first day of AY 2027-28) until the return filing date. If the return is filed on October 31, 2027 (7 months), interest = INR 20,84,000 x 1% x 7 = INR 1,45,880.

Combined Impact

Sections 234B and 234C can apply simultaneously. For a company with INR 1 crore tax liability that significantly underestimates its advance tax, the combined interest can easily reach INR 5-10 lakh — a meaningful impact on the effective tax rate.

Special Provisions for Foreign Companies

Branch Offices and Permanent Establishments

A branch office in India is taxed as a foreign company at the higher rate of 35% (plus surcharge and cess). The advance tax obligation is calculated on the income attributable to the Indian branch. This requires careful attribution of revenue and expenses between the head office and the branch, following the principles laid out in the applicable DTAA.

Presumptive Taxation

Foreign companies engaged in certain activities — such as oil exploration, aircraft or shipping operations, or turnkey projects — may be taxed under presumptive provisions (Sections 44B, 44BB, 44BBA, 44BBB). Under presumptive taxation, a fixed percentage of gross receipts is deemed as income.

Companies under presumptive taxation (Sections 44AD and 44ADA) can pay their entire advance tax liability in a single instalment by March 15. This is a significant simplification, but it applies primarily to smaller businesses and professionals.

Treaty Benefits and Advance Tax

If your company claims reduced tax rates under a DTAA — for example, a lower withholding tax rate on royalties or interest — the advance tax should be calculated based on the treaty rate, not the domestic rate. However, the company must ensure it holds a valid Tax Residency Certificate (TRC) and has filed Form 10F to substantiate the treaty claim.

Practical Challenges for Foreign-Owned Companies

Revenue Estimation with Intercompany Transactions

The biggest challenge is estimating taxable income when a significant portion of revenue or costs involves transfer pricing adjustments. If the parent company revises intercompany pricing mid-year — or if the transfer pricing study reveals that the Indian subsidiary's profit margin needs to be adjusted — the advance tax estimate must be revised.

Best practice: Review the advance tax estimate at each quarterly instalment date. Use the latest management accounts, not the annual budget, as the basis for estimation.

Currency Fluctuation Impact

For companies with foreign currency receivables or payables, exchange rate movements between estimation and actual settlement can materially change taxable income. A 5% depreciation of the rupee against the dollar can increase the rupee value of export revenue and create an unexpected tax liability.

Capital Gains

If the Indian subsidiary sells any capital asset during the year — whether it is property, investments, or intellectual property — the resulting capital gain must be included in the advance tax calculation for the quarter in which the gain arises. Unlike business income, capital gains advance tax can be paid in the instalment immediately following the quarter of the gain (not spread across all four instalments).

First-Year Operations

For newly incorporated subsidiaries, advance tax is still required if the estimated tax liability exceeds INR 10,000. Many foreign companies mistakenly believe that advance tax does not apply in the first year of operations. It does.

How to Pay Advance Tax

1. Log in to the Income Tax e-Filing portal (incometax.gov.in)
2. Navigate to e-Pay Tax and select Challan No. 280 (ITNS 280)
3. Select the applicable tax type: Corporation Tax (0020) for companies
4. Select the payment type: Advance Tax (100)
5. Enter the assessment year: 2027-28 (for FY 2026-27 payments)
6. Enter the PAN of the company and the amount
7. Pay via net banking, debit card, or NEFT/RTGS
8. Download and retain the challan receipt (CIN number) for your records

Ensure the payment is made before 11:59 PM on the due date. Payments made on the next day will be treated as late payments even if the due date falls on a bank holiday (though administrative extensions are sometimes granted).

Key Takeaways

• Advance tax is mandatory for any company — domestic or foreign — with an estimated tax liability exceeding INR 10,000 after TDS credits.
• The four instalment deadlines (June 15, September 15, December 15, March 15) are non-negotiable, with cumulative thresholds of 15%, 45%, 75%, and 100%.
• Interest under Section 234C (instalment shortfall) and 234B (total shortfall below 90%) can compound to a significant cost — plan quarterly reviews of your tax estimate.
• Foreign companies face additional complexity from transfer pricing adjustments, currency fluctuations, and treaty rate calculations.
• Use the latest management accounts — not the annual budget — when revising advance tax estimates each quarter.