According to the Income Tax Act of 1961, if someone doesn’t follow the tax rules, they may have to pay penalties. These penalties include interest on unpaid tax amounts. Section 234 outlines these penalties, and specifically, Section 234B deals with interest charged for not making advance tax payments on time, especially if the taxpayer fails to pay online.
Understanding Section 234B of the Income Tax Act
Section 234B states that if a taxpayer is late in paying their advance tax online, they will have to pay interest. This interest can also apply if the taxpayer pays some advance tax, but it is less than 90% of the total tax owed.
There are two main situations where this interest is charged:
- If the taxpayer is late in paying advance tax when their tax bill, after deducting TDS and other payments, is Rs 10,000 or more.
- If the taxpayer has paid advance tax, but the amount is less than 90% of what they should have paid.
What Is Advance Tax?
Advance tax is a type of tax that taxpayers must pay if they owe Rs. 10,000 or more in taxes for the financial year. This tax is paid in smaller amounts throughout the year instead of as a large payment at the end of the year.
People usually pay this tax based on different sources of income, like their salary. If someone misses the due dates for these payments or doesn’t pay at all, they may have to pay interest under Section 234B.
Who Needs to Pay Advance Tax?
- Individuals (Salaried and Freelancers/Professionals): If your total tax owed after TDS is ₹10,000 or more in a financial year, you need to pay advance tax.
- Businesses/Corporations: Companies, partnerships, and LLPs must pay advance tax if they meet the required income threshold.
- Self-Employed/Freelancers/Professionals: If your income isn’t taxed at the source and your tax liability exceeds ₹10,000 for the year, you should pay advance tax online.
- Capital Gains/Other Income Sources: If you earn significant money from sources like capital gains, rental income, or interest, and your total tax liability is over ₹10,000, you need to pay advance tax.
How Much Interest Is Charged Under Section 234B?
If a taxpayer doesn’t pay their advance tax online or pays less than 90% of the required amount, they will incur an interest charge of 1% per month, or part of a month, for the period of delay. This interest can also apply if your tax liability, after accounting for certain reliefs, is over Rs. 10,000 and you haven’t paid any advance tax.
If the taxpayer submits an updated Income Tax Return (ITR), the amount of advance tax owed will be reduced, which will affect the interest calculation under Section 234B.
Example of Interest Calculation Under Section 234B
Let’s say a taxpayer has an assessed tax liability of ₹50,000 for the financial year. They need to pay advance tax in installments due on June 15, September 15, and December 15.
If the taxpayer misses the payment due on September 15, the interest will start accumulating from September 16 until they actually make the payment. The interest rate is 1% per month on the unpaid amount.
Factors Affecting Interest Amount
- Delay Period: The longer you wait to pay, the more interest you’ll have to pay.
- Tax Liability: If your tax liability is higher, the interest amount will also be higher if you don’t pay the full advance tax or if you pay late.
What Does “Assessed Tax” Mean?
Assessed tax is the amount of tax determined by the authorities that a taxpayer needs to pay. Here’s a simple breakdown:
- Under Section 143(1): When tax is assessed this way, the assessed tax is the total tax on income, before any interest or penalties are added.
- Regular Assessment: In this case, the assessed tax is the total tax on income minus deductions for:
- TDS/TCS (tax deducted or collected at source)
- Any tax relief allowed under specific sections (like 89, 90, 90A, or 91)
- Tax credits from sections 115JAA or 115JD
In short, assessed tax is what the taxpayer owes after accounting for any taxes already paid, relief, or credits.
How to Calculate Interest Under Section 234B
If a taxpayer fails to pay their advance tax, either fully or partially, they will incur a penalty in the form of interest. Here’s how to compute it:
- Interest Rate: The interest charged is 1% on the assessed tax (the amount owed after accounting for any advance tax already paid).
- Rounding: If there’s a part of a month, it is counted as a full month for interest calculation. Any amount used for calculating interest is rounded down, meaning that fractions of a hundred are ignored.
- Using Tools: Taxpayers can use an advance tax calculator to help determine their advance tax installments and the interest amount due.
This approach ensures that the taxpayer understands how much interest they owe if they miss their advance tax payments.
Interest Calculation Under Section 234B
The interest applicable under Section 234B can be divided into three scenarios:
No TDS and Tax Exceeds ₹10,000
If a taxpayer has no tax deducted at source and their total tax is over ₹10,000, they must pay advance tax.
Example:
Mrs X has a tax liability of ₹50,000 with no TDS. Since this amount is over ₹10,000 and she only pays it when filing her return on June 15, she owes interest for three months: April, May, and June.
Interest Calculation: ₹50,000 * 1% * 3 months = ₹1,500. So, Mrs X owes ₹1,500 in interest.
TDS Applied and Tax Exceeds ₹10,000
If the total tax after TDS is over ₹10,000 and the taxpayer defaults on advance tax payments, interest applies.
Example:
Mrs Y has a total tax of ₹1,00,000 and a TDS of ₹60,000. Her remaining tax liability is ₹40,000. She should have paid 90% of this (₹36,000) by March but only paid ₹20,000. Therefore, she is liable for interest on the remaining ₹20,000 for four months: April, May, June, and July.
Interest Calculation: (₹40,000 – ₹20,000) * 1% * 4 months = ₹800.
Mrs Y owes ₹800 in interest.
Partial Advance Tax Payment:
If a taxpayer pays less than 90% of their assessed tax, they are liable for interest on the unpaid amount for the months delayed.
Example:
Mr S has a tax liability of ₹70,000 and pays ₹30,000 in March, which is less than the required 90% of ₹63,000. He pays the balance when filing his return in June. He owes interest for April, May, and June on the remaining ₹40,000.
Interest Calculation: (₹70,000 – ₹30,000) * 1% * 3 months = ₹1,500. So, Mr S pays ₹1,500 in interest.
It’s crucial to pay your advance tax installments on time to avoid penalties and notices. If you have any questions about calculating interest or need expert help, consider reaching out to tax professionals for guidance.
Frequently Asked Questions (FAQs)
Why is interest required under the Income Tax Act?
You must pay interest if you don’t pay your taxes on time or fail to follow the income tax rules. This interest acts as a penalty for the delay.
Is there a penalty for delaying advance tax payments?
Yes, if you delay your advance tax payment, you will incur a penalty in the form of interest based on the taxable amount for each month of delay.
How is interest calculated for late advance tax payments under Section 234B?
Interest for late advance tax payments is calculated from the due date until the actual payment date. The rate is 1% per month for each month you delay.
How can I avoid paying interest under Section 234B?
To avoid interest, make sure to pay your advance tax on time, following the deadlines set by the Income Tax Department. Note that resident senior citizens aged 60 and older are exempt from interest under Section 234B.
What are the limits regarding Section 234B?
Taxpayers must pay at least 90% of their total tax liability by the end of the financial year. If they fail to do so and owe more than 10% of their total tax, they will be charged a penalty of 1% simple interest under Section 234B.
