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 mandates the imposition of interest on taxpayers who fail to pay the requisite advance tax. This interest is levied at a specified rate for a defined period.
The section applies to individuals who have not paid at least 90% of their estimated net tax liability. The interest rate is 1% per month or part thereof, calculated from the due date of the return until the actual filing date. To avoid incurring interest under Section 234B, taxpayers must ensure timely payment of advance taxes as per the Income Tax Department's guidelines. It's noteworthy that resident senior citizens aged 60 or above are exempt from this interest penalty.
Interest under Section 234A of the Income Tax Act
If you fail to submit your income tax return by the prescribed due date, you will be subject to interest under Section 234A. This interest is calculated at a rate of 1% per month or a portion thereof, beginning on the day following the due date and ending on the day you actually file your return. In the event that no return is filed, the interest period will conclude on the date the tax department completes the assessment process.
Example: If your tax liability for the financial year 2017-18 is Rs. 9,500, and the due date for filing is July 31, 2018, you would be liable to pay interest of Rs. 95 (1% of Rs. 9,500 for one month) under Section 234A if you file your return on August 30, 2018.
To avoid or minimise interest charges, it is advisable to file your income tax return promptly, even if you have outstanding tax liabilities.
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.
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.
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.
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.
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.
For deeper insights, here are additional articles that are closely aligned with your interests
- Income Tax Slabs for FY 24-25
- Income tax return extended date for AY 2024-25
- Section 112A of Income Tax Act
- Section 111A of Income Tax Act
- Section 56 of Income Tax Act
Understanding interest calculation under Section 234B of the Income Tax Act
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.
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.
