Interest Under Section 234C – Interest for deferment 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 234C of the Income Tax Act, 1961.
What is the interest levied under Section 234C?
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 by following dates:
Any tax payer who has opted for presumptive taxation u/s 44AD or 44ADA (i.e. computation of business income @ 8% of annual turnover) have to pay 100% advance tax on or before 15th March.
If there is default in payment of advance tax as per the above rules, then penalty in the form of interest is levied on the taxpayer.
In case of any taxpayer (other than those who opted for presumptive taxation), interest under section 234C will be levied under following circumstances:
- If Advance Tax is paid on or before 15th June is less than 12% of the tax due
- If Advance Tax is paid on or before 15th September is less than 36% of the tax due
- If Advance Tax is paid on or before 15th December is less than 75% of the tax due
- If Advance Tax is paid on or before 15th March is less than 100% of the tax due
Note: ‘Tax Due’ means amount of tax chargeable on total income as declared in the return 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. Presumptive Taxation – In case of tax payers who have opted for presumptive taxation under section 44AD or 44ADA, interest is levied if advance tax paid on or before 15th March is less than 100% of the tax due.
#2. Special conditions – Interest will not be levied if shortfall in payment of advance tax is due failure to estimate income from capital gains or winning from lottery or income from new business or dividend received from domestic companies in excess of ₹ 10,00,000. However, the tax payer has to pay the whole of the amount of tax on such income on the immediately following installments or till 31st March, if no installments are pending.
#3. Period of Interest – In cases of short fall in payment of 1st, 2nd and 3rd installment interest will be levied for 3 months. In case of last installment, interest will be levied for 1 month.
#4. 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 short paid amount of installments of advance tax paid.
#5. 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.
Calculation of Interest under Section 234C – Example
Amber is a lawyer and runs his practice in Ahmedabad. His tax liability for the Assessment Year 2017-18 comes to ₹ 1,20,000. He has tax credit of ₹ 25,000 and has paid advance tax on the following dates:
- ₹ 12,000 on 15th June 2016
- ₹ 20,000 on 15th September 2016
- ₹ 27,000 on 15th December 2016
- ₹ 25,000 on 15th March 2017
The balance amount of tax i.e. ₹ 11,000 was paid at the time of filing his return on 20th July 2017. Is Amber liable to pay interest under section 234C? If yes, what is his liability?
Solution : It is clear that any person who is liable to pay advance tax have to pay advance tax in installments by 15th June, 15th September, 15th December and 15th March. Also, any tax paid before 31st March will be treated as advance tax.
As Amber has tax credit of ₹ 25,000, amount of advance tax due will be ₹ 95,000. Interest on shortfall is calculated as follows:
Therefore, interest under section 234C will be ₹ 800.
He is also liable to pay interest under section 234B for failure to pay 90% of the assessed tax before 31st March. As he has paid ₹ 11,000 on 20th July, interest under section 234B @ 1% per month will be levied for 4 months (i.e. April to July).
Interest under section 234B will be ₹ 440 (11000*1%*4).
Total interest payable by Amber will be ₹ 1240 (800+440).