Section 234b of the Income Tax Act: Interest for Default Advance Tax Payment

As per section 234B of the Income Tax Act, 1961, if the taxpayer defaults or delays the payment of advance tax, they will have to pay the interest of 1% on assessed tax per month. It is a simple interest and could also be imposed if the tax paid is less than 90% of the assessed tax.

In this article, you will learn everything a taxpayer must know about Section 234B of the Income Tax Act.

Meaning of Advance Tax

Instead of paying the lump sum tax amount at the end of the year, taxpayers need to pay advance tax. Advance tax is the tax to be paid by the taxpayer regularly during the year and before the end of the relevant financial year. Such instalments are to be paid on or before the due dates prescribed by the income tax department. With the process of advance tax, the tax collection process has become more efficient. The defaulter of tax payment must pay interest according to Section 234B of the Income Tax Act.

Who is Required to Pay Advance Tax?

As per section 208, every person whose estimated tax liability for the year is Rs. 10,000 or more, is liable to pay their tax in advance, in the form of “advance tax”.

Exception: Advance tax does not apply to a senior citizen (a resident individual aged 60 years or more) who does not have income from business and profession.

Who Should Not Pay Advance Tax?

Under Section 207 of the Income Tax Act, an individual who satisfies the following criteria is not required to pay advance tax.

• An individual
• Resident in India as per the Income-tax Act
• Of the age of 60 years or above at any time during the year
• Does not have any income from business or profession

Interest Charged Under Section 234B of the Income Tax Act

A taxpayer is charged interest under Section 234B of the Income Tax Act if:

1. In any financial year, the tax liability is more than ₹10,000, and the taxpayer failed to pay advance tax.
2. The taxpayer paid a portion of it, i.e., less than 90% of the assessed tax.

In either of the cases, the taxpayer will have to pay interest under Section 234B till the date of delay in payment.

Interest Rate Under Section 234B of The Income Tax Act

Interest is calculated at the rate of 1% on the assessed tax minus advance tax. A part of the month is rounded off to a full month. The nature of such interest is simple interest. The amount on which this interest is calculated is also rounded off such that the fraction of a hundred is ignored.

Calculation of Interest Under Section 234B of the Income Tax Act

Interest at the rate of 1% is levied on the unpaid advance tax amount. If there is a shortfall in the payment of advance tax, interest is levied on the amount. In case no advance tax is paid by the taxpayer, they will need to pay interest under Section 234B on the full amount of assessed tax.

Meaning of Assessed Tax

Assessed tax means the total taxable income minus the following:

1. Tax deducted or collected at source.
2. Tax relief or deductions are allowed under the Income Tax Act, like Sections 80C and 80D, among others.
3. Tax credit under Section 115 JAA or 115 JD.

Now that you have understood the meaning of advance tax and when the liability to pay interest arises, we shall now understand the concept better through some examples.

Understanding Section 234B With Examples

Example 1:

Sakshi is liable to pay a sum of ₹60,000 as tax. No Tax was Deducted at Source (TDS) in her case. Therefore, she was liable to pay the full amount as her tax liability. She paid this amount on 17th June while filing her income tax return. Since her tax liability exceeded ₹10,000, she was liable to pay advance tax. Therefore, she will be paying interest under section 234B of the Income Tax Act for April, May and June.

Calculation of interest

₹60,000 x 1% x 3 = ₹1800

Thus, Sakshi is liable to pay interest of ₹1,800 as per section 234B of the Income Tax Act.

Example 2:

Bhavna has to pay a total tax of ₹46,000 for FY2021-22. There was no tax deduction at the source. She paid an advance tax of ₹35,000 on 25th March. The remaining balance was paid by her at the time of filing her income tax return on 7th June. Though Bhavna paid advance tax, we need to check whether she paid at least 90% of the assessed tax as her advance tax. So, 90% of 46,000 is ₹41,400. However, Bhavna deposited only ₹35,000, which is less than 90% of the assessed tax. Hence, she is liable to pay interest under section 234B for April, May and June.

Calculation of interest

46,000 (assessed tax) – 35,000 (paid as advance tax) = 11,000

11,000 x 1% 3 = ₹330.

Thus, Bhavna is liable to pay an interest of ₹330.

Example 3:

Let’s assume Aditya has to pay a tax of ₹1,35,000 for the financial year. A TDS of ₹45,000 was already deducted from his income. Aditya paid ₹37,000 on 10th January as advance tax. The balance was paid by him on 2nd July while filing his income tax return. Let’s check whether he needs to pay interest under section 234B of the Income Tax Act. The assessed tax of Aditya is ₹1,35,000 (total tax liability) – ₹45,000 (TDS) = 90,000. Out of this, he should have paid at least 90% i.e. ₹81,000. However, he only paid ₹37,000. Therefore, he will be held liable to pay interest under section 234B for April, May, June and July.

Calculation of interest

₹90,000 (Assessed tax) – ₹37,000 (advance tax paid) = ₹53,000

₹53,000 x 1% x 4 = ₹2120.

Thus, Aditya is liable to pay an interest of ₹2,120.

Period of Levy of Interest Under Section 234B of The Income Tax Act

Interest is levied under Section 234B from the first day of the assessment year till the date a regular assessment is done.

Let us understand better with the help of these examples.

Case 1: When the assessee did not pay any advance tax during the year

Tanvi has to pay a total tax of ₹55,000 for the financial year. She does not have any TDS / TCS. She paid the entire tax amount only while filing her income tax return on 26th May.

So, she will be held liable to pay advance tax since her tax liability exceeds ₹10,000. Also, she will have to pay interest under section 234B for April and May. The interest amount will be ₹1,100 (55,000 x 1% x 2).

Case 2: When the assessee paid advance tax, but less than 90%.

Himanshu has a total tax liability of ₹1,20,000. He paid ₹98,000 as advance tax on 19th March. The residual is paid by him while filing his return on 3rd July.

Let us first check if the advance tax paid by him amounts to 90% of the assessed tax, i.e. ₹1,20,000. In this case, it is ₹1,08,000 (1,20,000 x 90%). But, he only paid ₹98,000. Therefore, he will have to pay interest under section 234B of the Income Tax Act. It will be levied for April, May, June and July. The interest amount will be ₹880 (1,20,000 – 98,000 x 1% x 4).

Case 3: Where the assessee has tax credit but paid advance tax less than 90%.

Umang has a total tax liability of ₹2,10,000. The total TDS deducted during the financial year was ₹70,000. He paid ₹1,00,000 on 13th March. The balance amount of tax was paid by him on 20th May while filing his return.

Firstly, let us calculate the total assessed tax: 2,10,000 – 70,000 = ₹1,40,000. He should have paid 90% of ₹1,40,000 i.e. ₹1,26,000 before 31st March. But, he only paid ₹1,00,000. Hence, he will have to pay interest under section 234B for April and May.

The interest amount will be ₹520 (1,26,000 – 1,00,000 x 1% x 2).

Conclusion

We talked about Section 234B of the Income Tax Act in the article. When it comes to tax compliance, you must be very serious and up-to-date to avoid penalties by way of interest. So, dear taxpayers, do not forget to pay your advance tax well in time to avoid such kinds of penalties.

References:

https://incometaxindia.gov.in/tutorials/32-%20exemption%20from%20pymt%20of%20adv.%20tax.pdf

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