section 234B

Interest Under Section 234B – Interest for defaults in payment of advance tax

There are penal provisions in the Income Tax Act, 1961 if you don’t file your return on or before due date (234A) or if there is delay in payment of Advance Tax (234B) or there is default in paying installments of Advance Tax (234C).

In this post we will discuss on calculation of penalty i.e. interest under section 234B of the Income Tax Act, 1961.

What is the interest levied under Section 234B?

As per section 208 of the Income Tax Act, 1961, if your estimated tax liability comes to ₹ 10,000 or more in a financial year, then you are liable to pay advance tax.

If there is default in paying Advance Tax, then interest under section 234B is levied as penalty.

Interest under this section is levied under two circumstances:

  1. When the taxpayer is liable to pay Advance Tax but has failed to pay; or
  2. When the tax payer has paid less than 90% of the Assessed Tax

Note: Assessed tax means amount of tax as determined under section 143(1) and where regular assessment has been made the tax on total income as determined under such regular assessment as reduced by TDS/TCS, relief/deduction claimed under sections 90/90A/91 and tax credit claimed under section15JAA/115JD. 

Manner of computation of Interest

While calculating interest under this section, following points needs to be kept in mind:

#1. Period of Interest – Interest will be payable from 1st day of the assessment year till the date of determination of income under section 143(1) or when regular assessment is made, then till the date of such regular assessment. For calculating this period, any fraction of the month shall be considered as full month.

#2. Amount liable to interest and rate of interest – Simple Interest is to be paid at the rate of 1% per month on the amount of assessed tax less advance tax paid.

Particulars   Amount
Assessed Tax XXXX
Less: Advance Tax (XXXX)
Amount of Unpaid/short paid advance tax XXXX

 

 

#3. Rounding off – When calculating interest, the amount of taxes due shall be rounded off to nearest multiple of ₹ 100 and any fraction of ₹ 100 shall be ignored.

For instance, if you have to calculate the interest under section 234B on the outstanding tax liability of ₹ 7479 for 5 months and 3 days, then the amount of tax shall have to be rounded off to ₹ 7400 and interest will be calculated for 6 months. (3 days will be considered as full month).

Calculation of Interest under Section 234B – Example

Aarya is a blogger and her tax liability for financial year 2016-17 comes to ₹ 1,25,000. She has paid advance tax of ₹ 62,000 and has TDS credit of ₹ 25,000. She has paid the balance tax liability on 18th July 2017 at the time of filing of return of income. What is her liability to pay interest under Section 234B?

Solution: As discussed above interest under Section 234B is levied for default in paying advance tax under two circumstances:

  1. When the taxpayer is liable to pay Advance Tax but has failed to pay; or
  2. When the tax payer has paid less than 90% of the Assessed Tax

The tax liability of Aarya after allowing TDS credit is ₹ 1,00,000 and she has paid advance tax of ₹ 62,000. This is less than the 90% of the assessed tax liability and hence, she is liable to pay interest under section 234B.

Therefore, as per the provisions mentioned above, interest at the rate of 1% per month for 4 months will have to be paid i.e. April to July. (part of the month is considered as full month)

Interest will be levied on unpaid tax liability of ₹ 38,000 (1,00,000 – 62,000).

(38,000 x 1%) x 4 = ₹ 1,520.

Therefore, Aarya has to pay ₹ 1,520 as interest under Section 234B.

Pratik Gelda

I'm a qualified Chartered Accountant and I love to write about economics, finance, taxation and investments. My aim is to make my readers economically literate and financially independent

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