Section 234A of Income Tax Act

Section 234A of the Income Tax Act deals with levying interest as a penalty on taxpayers who fail to file their Income Tax Return (ITR) before the due date specified by the Income Tax Department. The Indian government requires every earning taxpayer to file their Income Tax Return as per the provisions listed in various sections of the Income Tax Act. The government's main aim is to increase its tax base and ensure that earnings in India are accounted for and not used for illicit purposes or tax evasion. For an effective taxation process, the Income Tax Department has set a specific date before which every individual and entity must file their ITR. However, some individuals and entities fail to file their ITR before the due date.

In case you fail to file your ITR before the due date, you may be liable to pay interest charges as a penalty depending on the number of days you have delayed filing your ITR from the due date. The interest charged is levied under section 234A of the Income Tax Act. This blog will help you learn about all the provisions of section 234A of the Income Tax Act and how you can utilise the understanding to avoid tax penalties.

What is section 234A?

Section 234A of the Income Tax defines the provisions to levy interest on taxpayers who fail to file their Income Tax Returns (ITR) before the set due date. The interest payable under section 234A by a late ITR filer is calculated on the number of days the ITR has been delayed from the due date and the amount of tax that remains undeposited. As per the provisions of section 234A of the Income Tax Act, if a taxpayer fails to file their tax return by the due date, they are liable to pay interest at the rate of 1% per month or part of a month on the unpaid tax amount from the due date until the actual date of filing. The main aim of introducing section 234A of the Income Tax Act is to encourage the timely filing of tax returns and ensure that the government can collect taxes promptly.

What comes under Section 234?

Here are the provisions that come under section 234 to hold taxpayers liable to pay 1% interest if:

• The taxpayer fails to file an ITR and pay tax before the due date.

• If the taxpayer fails to submit Form 16 to the current employer after changing the previous company.

• If the taxpayer fails to comply with any other taxation rules applicable under various sections of the Income Tax Act.

If a taxpayer fails on any of the above-mentioned factors, interest is payable under the following three heads:

• Section 234A: Delay in filing and submitting the Income Tax Return

• Section 234B: Delay in paying Advance Tax

• Section 234C: Deferring the Advance Tax payment

Interest payable in section 234A

If a taxpayer fails to file ITR on time and delays the tax payment, the provisions of section 234A apply, and 1% interest is payable as a penalty on the undeposited tax amount. The interest is calculated based on the days the ITR has been delayed and then actually filed by the taxpayer. For this purpose, two cases apply:

1. If the taxpayer has not claimed his or her tax refund

In the case that the taxpayer has not claimed the tax refined, the taxpayer is liable to pay interest on the total outstanding amount.

Example: Ms. Ananya was supposed to file her income tax return by 30th September 2019 but delayed and filed her ITR in April 2020 for the financial year 2018-19. Her outstanding tax amount is Rs. 3 lakh. Ms. Ananya delayed her ITR for 7 months (October, November, December, January, February, March, and April), and, assuming she had not claimed her tax refund, she will be liable to pay interest as a penalty.

Interest to be paid will be = 300000 * 1% * 7 = Rs. 21,000

Under section 234A of the Income Tax Act, Ms. Ananya is liable to pay Rs. 21,000 as a penalty in the form of interest levied at 1% for the months delayed.

2. If the taxpayer has claimed his or her tax refund

If the taxpayer has claimed tax refund, even if no ITR has been filed on time, the interest is still charged on the outstanding tax amount. This amount is calculated by subtracting the tax refund from the total outstanding tax amount.

Example: Ms. Priya is eligible and claims a tax refund of Rs. 50,000 while filing her ITR in March 2020. The outstanding tax amount to be paid is Rs. 2 lakh. The penal interest will be charged on the net value obtained after adjusting the tax refund from the outstanding amount.

The net outstanding tax amount = 200000 - 50000 = 150000. Hence, the interest to be paid by her will be = 150000 * 1% * 6 = Rs. 9,000

Under Section 234A of the Income Tax Act, Ms. Priya is liable to pay Rs. 9,000 as a penalty in the form of interest levied at 1% for the 6 months delayed.

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How is interest under the Section 234A calculated?

Here are key points included in the process of calculating the interest under section 234A of the Income Tax Act:

• The interest rate applicable on the outstanding tax amount is 1%.

• The interest is calculated from the day after the due date of filing the ITR until the day on which the ITR is actually filed.

• If the taxpayers file no income tax, the payable interest is computed until the date of completion of the assessment year in question as per section 144.

• Under section 234A of the Income Tax Act, only simple interest is charged as a penalty.

• At the time of calculating the interest, the due tax amount is rounded off in the multiples of 100, and any fraction of 100 is ignored.

Calculation of interest penalty under section 234A by taking an example

Let's say Mr. Raj's total outstanding tax for the financial year 2018-19 is Rs. 80,000 (net of TDS and advance tax). He files his income tax return on 15th May 2020 instead of the due date of 31st July 2019. Therefore, he is 10 months late in filing his return. Since he hasn’t filed his ITR on time, he is liable to pay interest on the outstanding tax amount as per the provisions of section 234A of the Income Tax Act. In this case, the interest charged as a penalty will be calculated as:

Interest calculation: Interest = 80,000 * 1% * 10 = Rs. 8,000

Thus, Mr. Raj will need to pay an additional Rs. 8,000 as interest, along with his tax amount. If Mr. Raj did not file the Income Tax Return at all, the interest would continue to accrue at 1% per month until the assessment year, March 31, 2021.

Penalties under section 234

The penalties under section 234 are failing to pay taxes, submitting Form 16 to the current employer, and not complying with taxation rules. The penalties are levied under three sub-sections:

• Section 234A: Delay in filing the Income Tax Return

• Section 234B: Delay in paying Advance Tax

• Section 234C: Deferring the Advance Tax payment

The key points regarding section 234A of Income Tax Act

Here are some of the key points regarding section 234A of the Income Tax Act:

• Delayed filing: If taxpayers delay filing their ITR and the due date has passed, they are liable to pay interest as a penalty under section 234A of the Income Tax Act.

• Interest calculation: The interest rate under section 234A is 1% per month or part of a month on the unpaid tax amount.

• Calculation period: Interest is calculated from the due date of filing the return until the actual filing date

• Tax amount: The interest is computed on the amount of tax payable after accounting for advance tax, TDS, and other applicable rebates or deductions.

Conclusion

The Indian government requires taxpayers to file their ITRs before the due date. However, if you fail to claim a refund or file your ITR on time, you are liable to pay 1% interest on the outstanding tax amount every month or part of a month until the ITR is filed. Hence, it is important that you file your ITR on time to avoid interest penalties under section 234A of the Income Tax Act.

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