Section 234B: Interest on Delayed Payment of Advance Tax

What is Section 234B of the Income Tax Act?

If the taxpayer delays the advance tax payment online charged to him or her, he or she will have to pay interest under section 234B. This interest can also be levied on you if you have paid the advance tax and the amount is less than 90% of the assessed tax.

That means there are two conditions under which the interest is charged to the taxpayer under Section 234B. These are;

• If the taxpayer delayed the advance tax payment when his or her tax liability after reducing TDS for the financial year is Rs 10,000 or more
• If the taxpayer paid the advance tax but not the complete amount, i.e., the amount he paid is less than 90% of the assessed amount.

What is the Meaning of Advance Tax?

This advance tax applies to taxpayers who are liable to pay Rs.10,000 or more as taxes in the financial year. Those with tax liability pay this tax from various income sources, including salary. As the name suggests, this amount is paid in advance and not as a lump-sum amount at the year-end. The defaulters of this advance tax payment online within advance tax due dates or a complete defaulter will be liable to pay interest under Section 234B.

Who Should Pay Advance Tax?

• Individuals (Salaried and Freelancers/Professionals): You're liable to pay advance tax if your total tax liability after TDS (Tax Deducted at Source) is ₹10,000 or more in a financial year.
• Businesses/Corporations: Any company or business entity, including partnerships and LLPs (Limited Liability Partnerships), that meets the criteria for advance tax payments (like exceeding the specified threshold) should pay advance tax.
• Self-Employed/Freelancers/Professionals: If your income is not subject to TDS, and your tax liability is more than ₹10,000 in a financial year, you should pay advance tax online.
• Capital Gains/Other Income Sources: Individuals earning significant income from sources other than salary, like capital gains, rental income, or interest, should pay advance tax if their total tax liability exceeds ₹10,000.

How Much Interest Will be Imposed on the Taxpayer Under Section 234B?

The interest that has to be levied on the defaulter taxpayer who has not paid the advance tax online or paid a part of it less than 90% of the assessed amount is 1% per month or part of the month till the time he or she has delayed advance tax payment online.

It can also be levied when your tax liability after considering relief under sections 89 and 90 of the FY is more than Rs.10,000, and you have not paid any advance tax.

If the taxpayer files an updated ITR, the amount of advance tax is lowered to calculate the interest under section 234B.

Example:

Suppose a taxpayer's assessed tax liability for the financial year is ₹50,000. The due dates for advance tax installments are June 15, September 15, and December 15. If the taxpayer fails to pay the installment due on September 15, the interest will be calculated from September 16 until the date of actual payment. The interest rate would be 1% per month.

Factors Affecting Interest Amount:

• Delay Period: The longer the delay in payment, the higher the interest amount.
• Tax Liability: A higher tax liability will result in a higher interest amount if the advance tax is not paid or is insufficient.

What Does the Term “Assessed Tax’ Mean?

Here is the definition of the term ‘Assessed Tax.’ The same means as under:-

• When the tax is determined under section 143(1), the assessed tax is equal to the tax on total income as determined under section 143(1). This is the tax payable by the taxpayer before any interest or penalty is added.
• When the tax is determined via regular assessment, the assessed tax is equal to the tax on total income minus the following deductions: the amount of TDS/TCS, relief of tax allowed under section 89/90/90A/91, and tax credit allowed under section 115JAA or section 115JD. This is the taxpayer’s net tax liability after taking into account the taxes already paid or credited.

Simply put, ‘assessed tax’ is the amount of tax the taxpayer has to pay or has paid after adjusting for any taxes withheld, relief, or credit.

Explain the Computation of Interest Under Section 234B

If the taxpayer defaults in advance tax payments completely or in part, he or she will be charged an amount as a penalty in the form of interest. The interest to be paid is 1% on the assessed tax ( the tax to be paid after the advance tax deduction). If there is a part of a month, it is rounded off to a full month. The amount on which interest is calculated is also rounded off so that any fraction of a hundred is ignored. You can also consider using an advance tax calculator to calculate your advance tax installments.

The applicable interest is divided into three cases:

1. When no tax deduction at source is made during the calculation of the tax and the amount is more than Rs. 10,000, the individual defaults to pay the advance tax.

2. When the total tax to be paid after Tax Deduction at Source is more than Rs. 10,000, the individual defaults to pay the advance tax.

3. If the advance tax is paid by the taxpayer but not complete. If the taxpayer pays less than 90% of the assessed tax, he or she is liable to pay interest for the months delayed.

Now that you know all about advance tax payments as their deadline, it is important to make sure that you pay your advance tax installments on time to avoid penalties and notices.

If still have doubts in regard to the interest calculation or need expert guidance while calculating advance tax, you can connect to our tax experts.

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