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Section 234B: Interest for Non-Payment of Advance Tax

by | Jun 16, 2024 | Income Tax | 0 comments

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Important Keyword: Advance Tax, Income Tax Filing, ITR Penalty, Section 234B.

Section 234B: Interest for Non-Payment of Advance Tax

The Income Tax Department (ITD) has set specific deadlines for taxpayers to fulfill their advance tax obligations. As outlined in Section 208 of the Income-tax Act, individuals must calculate their advance tax liability and make payments if their estimated tax liability for the fiscal year amounts to INR 10,000 or more.

Failing to pay the required advance tax amount or falling short of the mandated payments results in the imposition of interest under Section 234B of the Income Tax Act. This interest is levied at a rate of 1% per month or part thereof on the deficit amount of advance tax. It continues to accrue from the end of the financial year until the taxpayer settles their outstanding tax liability.

What is section 234B?

Section 234B of the Income Tax Act levies penalty interest on taxpayers who fail to pay advance tax during the assessment year. This penalty applies from the end of the financial year until the actual date of tax payment.

When taxpayers do not meet their advance tax obligations by the due dates set during the financial year, Section 234B comes into effect. It mandates interest payments on the amount of tax that should have been paid earlier but wasn’t. This interest accrues from the conclusion of the financial year until the actual settlement of taxes owed.

When is section 234B applicable?

Interest under section 234B of the Income Tax Act is computed in specific scenarios:

  1. Non-payment of Advance Tax: If a taxpayer is liable to pay advance tax but fails to do so.
  2. Shortfall in Advance Tax Payment: When the advance tax paid is less than 90% of the Assessed Tax. The Assessed Tax is calculated as the total tax liability minus TDS (Tax Deducted at Source) and TCS (Tax Collected at Source).

It’s important to note that the shortfall in advance tax payment is considered only once when recalculating the interest under section 234B, provided the taxpayer submits an updated Income Tax Return (ITR).

In addition to section 234B, the Income Tax Act covers other provisions related to interest and fees:

  • Interest for Late Filing of ITR: Covered under Section 234A, which imposes interest if the taxpayer files the ITR after the due date.
  • Deferred Payment of Advance Tax: Addressed by Section 234C, which applies when there is a delay or shortfall in the payment of advance tax installments.
  • Fee for Late Filing of ITR: Imposed under Section 234F, where a fee is levied for filing the ITR after the due date but before December 31st of the assessment year.

Example of Interest u/s 234B of Income Tax Act

Case 1: TDS is not deducted

In Ria’s case, her total tax liability amounted to INR 40,000. According to tax regulations, since this liability exceeds INR 10,000, Ria was required to pay advance tax in installments throughout the financial year. However, Ria paid the entire tax amount of INR 40,000 on 16th June when filing her income tax return, without making any advance tax payments earlier in the year.

Due to the non-payment of advance tax as required, Ria will be subject to interest under section 234B of the Income Tax Act. This interest will be levied from the end of the financial year (typically 31st March) until the date of actual payment, which in Ria’s case is 16th June.

The calculation of Interest under section 234B is as follows:

ParticularsAmount
Assessed taxINR 40,000
Amount on which interest will be payableINR 40,000
Rate of interestSimple interest @1% per month
Period for which interest will be payable1st April to 16th June (i.e., 3 months)
Interest payable
(INR 40,000 x 1% x 3 months)
INR 1200
Case 2: TDS is deducted

In Vijay’s case, his total tax liability for the year is INR 32,500. According to tax regulations, Vijay was required to pay advance tax in installments throughout the financial year. However, he did not make any advance tax payments until 31st March, which is the end of the financial year.

Despite not paying advance tax, Vijay has a TDS (Tax Deducted at Source) credit of INR 5,000. This credit reduces his total tax liability to INR 27,500 (INR 32,500 – INR 5,000).

Vijay paid the entire tax liability of INR 27,500 at the time of filing his income tax return on 31st July. As per the provisions of section 234B of the Income Tax Act, since Vijay did not pay any advance tax by the due dates during the assessment year, he will be liable to pay interest. This interest is calculated from the 1st day of the assessment year (which is typically 1st April) until the date of actual payment and filing of his return, which is 31st July in this case.

The calculation of Interest under section 234B is as follows:

ParticularsAmount
Assessed taxINR 32,500
Amount on which interest will be payableINR 27,500
Rate of interestSimple interest @1% per month
Period for which interest will be payable1st April to 31st July (i.e., 4 months)
Interest payable
(INR 27500 x 1% x 4 months)
INR 1100
Case 3: Shortfall in payment of advance tax

In Mohan’s case, his total tax liability for the year was INR 60,000. According to tax regulations, taxpayers are required to pay advance tax in installments throughout the financial year. The minimum amount to be paid as advance tax is 90% of the assessed tax liability.

Based on his total tax liability of INR 60,000, Mohan should have paid at least 90% of this amount as advance tax, which equals INR 54,000 (90% of INR 60,000).

Mohan paid INR 45,000 as advance tax on 15th March. This amount is less than 90% of his total tax liability of INR 60,000. Therefore, he did not meet the required advance tax payment threshold by the due date of 31st March.

Mohan paid the remaining balance of INR 15,000 on 20th June while filing his income tax return. As per section 234B of the Income Tax Act, since Mohan’s advance tax payment was less than 90% of his assessed tax liability, he will be liable to pay interest on the shortfall amount of INR 15,000. This interest is calculated from the 1st day of the assessment year (typically 1st April) until the date of actual payment, which in this case is 20th June.

The calculation of Interest under section 234B is as follows:

ParticularsAmount
Assessed taxINR 60,000
Amount on which interest will be payableINR 15,000
Rate of interestSimple interest @1% per month
Period for which interest will be payable1st April to 20th June (i.e., 3 months)
Interest payable
(INR 15000 x 1% x 3 months)
INR 450

Read More: Save yourself from paying excess TDS

Web Stories: Save yourself from paying excess TDS

Official Income Tax Return filing website: https://incometaxindia.gov.in/

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