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Section 234B: Interest on Delayed Payment of Advance Tax

Updated on: 20 Nov, 2023 02:49 PM

The Income Tax Act 1961 says that if a taxpayer defaults to abide by the rules and regulations stated in the act then he or she will be charged with certain penalties as punishments. This will be in the form of penal interest levied on taxable amount. The act slabbed these penalties under Section 234. The interest imposed for incomplete tax payments comes under the section 234B.

What is Section 234B under the Income Tax Act?

If the taxpayer delays the payment of advance tax 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 payment of advance tax 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 on time or defaulter completely 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 (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.

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 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 the payment.

To better understand this Section 234B, you should know the following terms and concepts:

What does the term “Assessed Tax’ mean?

Explanation 1 to section 234B, covers 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 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 net taxliability of the taxpayer 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 to pay advance tax 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.

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, and the individual defaults to pay the advance tax.

For example:Kritika is liable to pay a taxable amount of Rs. 50,000. There was no tax deduction at the source. She has to pay a tax of Rs. 50,000, which is more than 10,000. So she has to pay advance tax. But she paid the amount on 15th June while filing the return. In this case, she is responsible for paying interest under Section 234B for three months: April, May, and June.
The calculation of interest for Kritika will be done as =Rs. 50,000*1%*3
Thus, Kritika is liable to pay interest of Rs. 1,500 under Section 234B.

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.

For example: Mita has to pay a total tax of Rs. 1,00,000 for the financial year. The tax deduction at source is 60000. In March, she paid Rs 20,000, while she paid the balance in July. Her assessed tax = Total Tax- Tax Deduction at Source(TDS) = Rs. 1,00,000- Rs. 60,000= Rs. 40,000. She was liable to pay Rs. 40,000 as tax or 90% of this amount. 90% of the tax = 40000*90%=36000. She should have paid Rs. 36000 by march but only paid Rs. 20000. Hence, she is liable to pay interest for the late payment of the balance part of tax for four months, that is, April, May, June, and July. The interest calculation will be
40000-20000(advance tax)= 20000
Interest= 20000*1%*4 =Rs. 800
Thus, Mita is liable to pay interest of Rs 800 under section 234B.

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.

For example: Shekar has a total taxable amount of Rs. 70,000, out of which he paid Rs. 30,000 in March as advance tax. He paid the remaining amount when filing the return in June. The amount he should have paid was Rs. 63,000 as advance tax. But he paid Rs. 30, 000 which is less than 90% of his total tax liability. Therefore Shekhar is liable to pay interest for three months, i.e., April, May, and June, under this section. Calculation of interest
Amount on which interest is to be calculated = 70000-30000(advance tax)= 50000 Interest = 50000*1%*3 = 1500.
So, Shekhar pays Rs. 1,500 as interest under Section 234B.

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

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Frequently Asked Questions

Q- Why do you need to pay interest under the Income tax act?

If you default to pay taxes on time or do not comply with the rules and regulations of income tax you will be charged with a penalty in the form of interest.

Q- Does delay in advance tax charged with a penalty?

Yes, if you delay the payment of advance tax, you will be charged a penalty in the form of interest on the taxable amount for the months of delay.

Q- How is the interest calculated on the taxable amount under section 234B?

The interest that is charged for delay in paying advance tax under Section 234B is computed from the due date until the date the payment of advance tax is done in the financial year The interest is charged @1% per month for the months you have delayed your payment of advance tax.

CA Abhishek Soni
CA Abhishek Soni

Abhishek Soni is a Chartered Accountant by profession & entrepreneur by passion. He is the co-founder & CEO of Tax2win is amongst the top 25 emerging startups of Asia and authorized ERI by the Income Tax Department. In the past, he worked in EY and comes with wide industry experience from telecom, retail to manufacturing to entertainment where he has handled various national and international assignments.