Section 234B deals with the levy of interest on the taxpayer when there is a default or delay in payment of advance tax. Penal interests are also levied in case the taxpayer pays less than 90% of the assessed tax. A 1% penal interest is charged on the unpaid sum per month or part of the month. This article explores the nuances of Section 234B of the Income Tax Act, the penalty interest applicable, and how this interest is calculated.
What is Section 234B of the Income Tax Act?
Section 234B of the Income Tax Act imposes interest on taxpayers who either fail to pay or pay insufficient advance tax. Under the advance tax system, taxpayers are required to estimate their income and pay taxes in instalments throughout the financial year. If the advance tax payment falls below 90% of the total tax liability by the end of the financial year, Section 234B mandates an interest charge. This interest is calculated at 1% per month or part thereof, from April of the assessment year until the tax is fully paid. The provision encourages timely tax compliance and minimises default risks.
Interest is levied under Section 234B when a taxpayer's advance tax payments fall short of 90% of the assessed tax liability
What is assessed tax?
Assessed tax is the total income tax liability of a taxpayer. It is tax payable on the total income of the individual minus the deductions claimed. In other words, it is the final tax amount payable after subtracting TDS, advance tax, and any other applicable tax credit.
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What is an advance tax?
Advance tax is an income tax that’s paid in advance for the income earned in a particular financial year. It applies to taxpayers who are liable to pay Rs. 10,000 or more as taxes in a given financial year. Also known as ‘pay as you earn tax’, advance tax is paid in instalments within the stipulated due dates rather than as a lump-sum amount at the end of the financial year. If you fail to pay your advance tax liabilities on or before the deadlines specified by the IT Department or default on the same, you become liable to pay interest on the unpaid sum under Section 234B.
Who should pay advance tax?
Advance tax is applicable to a range of taxpayers. Here’s a breakdown of who needs to pay advance tax to avoid penalties under Section 234B:
Individuals (Salaried and freelancers/professionals)
Salaried employees, freelancers, and professionals are liable to pay advance tax if their total tax liability post-TDS deduction is Rs. 10,000 or more in a given financial year.
Businesses/corporations
Businesses, including partnership firms and Limited Liability Partnerships (LLPs), that meet the set tax liability threshold must pay advance tax.
Self-employed/freelancers/professionals
Self-employed individuals, professionals, and freelancers with a tax liability of more than Rs. 10,000 in a fiscal year need to deposit advance tax.
Capital gains/other income sources
Persons earning income from sources other than salary, like income from rent, capital gains from mutual fund schemes and stocks, interest income, etc. must also deposit advance tax if their total liability exceeds the Rs. 10,000 mark.
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Interest under section 234B of the Income Tax Act
Interest under section 234B is applicable under the following circumstances:
- If you failed to pay advance tax when your tax liability after deducting TDS, TCS, or relief under sections 89 and 90 for the concerned financial year exceeds Rs. 10,000.
- If you have paid less than 90% of the advance tax due.
In all the above cases, a 1% penal interest is applicable under section 234B of the Income Tax Act. Interest is calculated at the rate of 1% simple interest on the assessed tax less the advance tax for every delayed month. Part months are rounded off for calculation.
Example
Section 234B of the Income Tax Act imposes interest on taxpayers who either fail to pay or pay insufficient advance tax. Under the advance tax system, taxpayers are required to estimate their income and pay taxes in instalments throughout the financial year. If the advance tax payment falls below 90% of the total tax liability by the end of the financial year, Section 234B mandates an interest charge. This interest is calculated at 1% per month or part thereof, from April of the assessment year until the tax is fully paid. The provision encourages timely tax compliance and minimises default risks.
How to avoid interest under Section 234B of Income Tax Act?
Taxpayers can avoid incurring interest payments under section 234B of the Income Tax Act by paying their advance tax by the stated due dates. As a taxpayer, it is essential for you to keep a tab on the advance tax payment deadlines. Advance tax due dates for FY 2024-2025 for individual and corporate taxpayers are listed below:
| Payment Due Date | Amount Due |
| On or before 15th of July | 15% of your liability |
| On or before 15th of September | 45% of your liability |
| On or before 15th of December | 75% of your liability |
| On or before 15th of March | 100% of your liability |
Moreover, estimating your annual income correctly is vital to avoid attracting interest under section 234B. There are several advance tax calculator tools available online that can help you easily estimate your tax liabilities.
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Who should not pay advance tax?
The following categories of individuals are exempted from advance tax payments and thus needn’t worry about the penal interests under section 234B:
- Taxpayers who opt for the presumptive taxation scheme u/s 44AD to compute business income at a turnover of 8%.
- Senior citizens above the age of 60 years without any professional or business income.
What is the limit of 234B?
Under Section 234B, the maximum late fee for a financial year is limited to Rs. 10,000. Consequently, salaried individuals with a total annual tax liability below Rs. 10,000 are exempt from the late fee provisions of this section. However, if the tax liability reaches or surpasses Rs. 10,000, a late fee will be imposed for any delayed tax payments. The amount of the late fee is calculated based on the number of days the taxes remain overdue.
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Who should pay interest penalty as per Section 234B?
All taxpayers with an annual tax liability exceeding Rs. 10,000 are required to pay advance tax. This includes businessmen, self-employed professionals, and salaried employees. Interest under Section 234B is applicable in two primary scenarios:
- Failure to pay advance tax when required.
- Advance tax payments falling short of 90% of the total tax liability.
Example on how to compute interest on advance tax default
Under section 234B, interest is computed from 1st April (the first day of the assessment year). Interest continues to be calculated until the day of income determination u/s 143(1) or till the date of a regular assessment (whichever is applicable).
Let’s take a few illustrations to better understand how interest is calculated under section 234B of the Income Tax Act under different circumstances:
Case 1: When the assessee did not pay any advance tax during the year
Mr. Mitra had to pay a total tax of Rs. 50,00, and no tax was deducted at source (TDS). He paid the tax on June 13th while filing his ITR. Since his total liability is over Rs. 10,000, Mr. Mitra had to pay advance tax. However, since he missed the due date, he is liable to pay interest for three months (April, May, and June) under section 234B.
Interest payable = 50,000 x 1% x 3 = Rs. 1,500
Therefore, Mr. Mitra has to pay an interest of Rs. 1,500 under section 234B.
Case 2: When the assessee paid advance tax, but it was less than 90%
Mr. Singh has a tax liability of Rs. 1,10,000, out of which he deposited Rs. 69,000 in the form of advance tax on 15th March and the remaining balance of Rs. 41,000 on 20th June while filing his ITR. While Mr. Singh has paid advance tax, the sum paid is not 90% of the tax liability. If the total tax liability is Rs. 1,10,000, 90% of the same will be Rs. 99,000. But Mr. Singh has paid only Rs. 69,000. In this case, a penal interest of 1% will be applicable on the deficit amount under section 234B.
Amount on which interest is payable = 1,10,000 (assessed tax) - 69,000 (advance tax) = 41,000
Interest payable = 41,000 x 1% x 3 = Rs. 1,230
Therefore, Mr. Singh has to pay an interest of Rs. 1,230 under section 234B.
Case 3: Where the assessee has tax credit but paid advance tax less than 90%
The total tax liabilities of Mr. Sharma add up to Rs. 1,70,000 for a given financial year. A TDS of Rs. 1,23,000 was already deducted from his income. He paid Rs. 10,000 on 15th March and the remaining Rs. 37,000 on 20th July while filing ITR. In this case, Mr. Sharma’s assessed tax will be Rs. 47,000 (tax liability - TDS credit). To avoid interest under section 234B, he must pay 90% of the assessed tax or Rs. 42,300 in advance. However, since Mr. Sharma paid only Rs. 10,000, he will have to pay interest under section 234B of the Income Tax Act on the delay in advance tax payment for the months of April, May, June, and July.
Interest payable = (47,000 - 10,000) x 1% x 4 = Rs. 1,480
Therefore, Mr. Sharma has to pay an interest of Rs. 1,480 under section 234B.
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Key takeaways
Here’s a list of key takeaways from section 234B of the Income Tax Act:
- Section 234B levies interest on advance tax defaults, delayed payments, and when tax paid is less than 90% of the outstanding liability.
- The interest applicable is 1% per month (parts of months rounded off) on the unpaid balance.
- Interest calculations start from the first day of April, following the end of a financial year, until the date when the unpaid dues are cleared.
Conclusion
An increased tax liability is a nightmare for all taxpayers. Understanding the provisions of section 234B can help taxpayers avoid additional liabilities. Paying your advance tax dues by the stipulated deadline can help you avoid penalty interest applicable under section 234B and maintain proper compliance.
