Interest under Section 234B – Default on Payment of Advance Tax

Advance Tax means income tax which is to be paid in advance. The Scheme of Advance Tax is also known as Pay as you earn scheme. The advance tax is to be paid in various installments, which are spread over the financial year.

There are similar other penalties Under Section 234A (Default in the filing of Tax Returns) and Section 234C (Deferment of Advance Tax).

There can be two scenarios where this interest is applicable –

Your tax liability for the financial year is Rs.10,000 or more and you did not pay any advance tax as per installments.
OR
You are required to pay advance tax but has not paid atleast 90% of such advance tax on or before 31st March of the financial year.

In any of above cases, interest of Section 234B will be levied.

You will have to pay interest of 1% p.m or part of the month till the tax is actually paid.

In simple words, Interest under Section 234B will be levied:

ü If Tax Paid < 90% of Advance Tax Liability.

ü Interest under Section 234B will start from 1st April of Assessment year & will continue till tax is actually paid

How is interest u/s 234B calculated?

Let’s understand with an Illustration:

Illustration- 1

Ritika’s total tax liability is Rs 52,000. Ritika paid this amount on 9th July while filing her return.

Ritika’s total tax liability is more than Rs 10,000, she was liable to pay advance tax. Therefore, Ritika will be liable to pay interest under section 234B.

Interest calculation

Rs 52,000 x 1% x 4 (April, May, June, July)

= Rs 2,080

Ritika is liable to pay Rs 2,080 interest as per section 234B.

Illustration- 2

Mr. Ghanshyam is running his own business. Tax liability of him determined is Rs. 38,400. No advance tax is paid but there is a credit of TDS of Rs. 10,000 in his account. Balance tax is paid by him on 31st July( on due date of filing return). Will Mr. Ghanshyam be liable to pay interest u/s 234B?

In this case, the tax liability (after allowing credit of TDS) of Mr. Ghanshyam comes to Rs. 28,400 (i.e. Rs. 38,400 – Rs. 10,000) which exceeds Rs. 10,000 and hence, he is liable to pay advance tax. As Mr. Ghanshyam has not paid any advance tax and hence, he will be liable to pay interest u/s 234 B.

Interest under section 234B will be levied at 1% per month or part of the month. In this case, Mr. Ghanshyam has paid the outstanding tax on 31st July and thus, the interest u/s 234B will be levied for the period from 1st April to 31st July i.e. for 4 months and shall be levied on unpaid tax liability of Rs. 28,400. Interest at 1% per month on Rs. 28,400 for 4 months will come to Rs 1,136 .

Illustration- 3

Assume that Mr. Manas needs to pay total tax for the financial year is Rs. 1,50,000. A TDS of Rs 1,35,627 was already deducted from his total income. Manas have paid Rs 5,000 on 25th March and balance amount of Rs 9,373 paid by him at the time of return filing on 20th July.

Lets check whether Manas needs to pay interest under section 234B

First let’s calculate assessed tax. Assessed tax = Rs 1,50,000 (total tax) less Rs 1,35,627 (TDS)

= Rs 14,373

Manas should have paid at least 90% of the assessed tax or 90% of Rs 14,373 which is Rs 12,935 before 31st March. However, he paid only Rs 5,000. Therefore, Manas is liable to pay interest u/s 234B

Interest calculation

Rs 14,300(assessed tax) – Rs 5000 (Advance Tax) = Rs 9300

Rs 9300 x 1% x 4 months*

= Rs 372.

Therefore, Rs 372 is the interest payable under section 234B by Manas.

* For Months- (April, May, June, July)

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