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March 15th (or September 15th for some taxpayers) is a crucial date for every tax-paying individual in India. It marks the deadline for paying advance tax, an estimated tax payment on your taxable income throughout the financial year. While fulfilling this obligation, savvy taxpayers can utilise a smart strategy called tax-loss harvesting to potentially reduce their tax burden. This blog delves into both concepts, explaining their mechanics and how they can work together for tax efficiency.

What is advance tax?

The Indian tax system follows the principle of pay-as-you-earn. Advance tax is a mechanism to ensure that the government receives tax dues throughout the year, rather than a lump sum at the time of filing your income tax return (ITR).

Here's a breakdown of who needs to pay advance tax:

  • Salaried Individuals: If your total tax liability after considering Tax Deducted at Source (TDS) is likely to exceed ₹10,000 in a financial year, you are required to pay advance tax.
  • Business Owners and Professionals: Individuals running businesses or practising professions are responsible for paying advance tax if their estimated tax liability is likely to exceed ₹10,000.

Calculating and paying advance tax

Calculating advance tax can seem daunting, but it can be simplified by following these steps:

  1. Estimate Your Taxable Income: Consider your salary income, business income, capital gains, and other sources of income. Deduct allowable exemptions and deductions to arrive at your taxable income.
  2. Calculate Your Tax Liability: Apply the applicable tax slabs and rates to your taxable income to determine your total tax liability.
  3. Factor in TDS: Deduct any TDS already deducted at source from your salary or other income sources.
  4. Calculate Advance Tax Instalments: Advance tax needs to be paid in instalments throughout the financial year. The due dates and applicable percentages are as follows:

    • 15th June: 15% of total tax liability
    • 15th September: 45% of total tax liability (30% if income from business/profession exceeds 50% of gross total income)
    • 31st December: 75% of total tax liability (60% if income from business/profession exceeds 50% of gross total income)

  5. Payment Methods: Advance tax can be paid online through the government's e-filing portal or offline at designated banks.

Remember: These are simplified guidelines. For specific details and calculations, consult a tax professional.

What is tax loss harvesting?

Tax-loss harvesting is an investment strategy that allows you to offset capital gains incurred from selling profitable investments by selling assets that have experienced a loss.

Here's how it works:

  1. Identify Loss-Making Investments: Review your investment portfolio and identify assets that have declined in value compared to your purchase price.
  2. Sell the Loss-Making Assets: Sell these assets to realise a capital loss.
  3. Offset Capital Gains: The capital loss generated can be used to offset any capital gains earned from selling other investments, thereby reducing your overall tax liability.

How to utilise tax loss harvesting with advance tax filing?

Advance tax planning and tax-loss harvesting can be powerful tools used in conjunction to optimise your tax situation:

  • Reduce Tax Liability: Tax-loss harvesting helps minimise your capital gains tax burden, potentially lowering your overall advance tax liability.
  • Strategic Investment Management: Reviewing your portfolio for tax-loss harvesting opportunities can also prompt you to rebalance your portfolio and make strategic investment decisions.

Important considerations

  • Wash Sale Rule: Be mindful of the wash-sale rule, which prevents you from repurchasing the same or a substantially similar asset within 30 days of selling it at a loss.
  • Long-Term Investment Horizon: Tax-loss harvesting should not be the sole reason for selling an investment. Consider your long-term investment goals before making any decisions.

Conclusion

By understanding advance tax requirements and utilising tax-loss harvesting strategies effectively, you can take control of your tax burden and maximise your after-tax return. Remember, consulting a qualified tax advisor can provide personalised guidance based on your specific financial situation and investment portfolio. So, equip yourself with the necessary knowledge, leverage these strategies, and ensure smooth sailing towards meeting your advance tax deadline.

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