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Explained: Penalty on Interest Imposed Under Section 234A, 234B, and 234C

Explained: Penalty on Interest Imposed Under Section 234A, 234B, and 234C

Interest imposed

Paying income tax and filing income tax returns is the duty of every citizen of India. It is a good practice to maintain and also helps you recover TDS payments. Your taxes are a major source of revenue for the government which it uses for important public programs and services. There are tax reduction and saving provisions that come with a term plan or a life insurance plan which can reduce your eventual payable amount.

Types of Interest Under Section 234

With proper planning, one can maintain timely tax payments. However, if not planned on time, you might end up delaying your payments. The interest rates for various types of defaults are listed under Section 234A, Section 234B, and Section 234C of the IT (Income Tax) Act. Let us have a look at all of them in detail.

1. Section 234A – Interest for Default in Filing Tax Return

The interest levied for delay in filing the return of income comes under section 234A of the Income Tax Act. If the taxpayer files their income tax return after the due date specified by the authorities, an interest under this section will be levied.

Let’s assume Mr.X has an outstanding amount of Rs. 2,00,000, which includes his net advance tax plus TDS. Now, instead of November 30, 2020, he files his returns on May 15, 2021. He is hence, late by six months. His interest will thus be:

2,00,000 X 1% X 5 = Rs.10,000

Mr.X will now pay an additional Rs. 10,000. If he continues to not pay his dues even further, an additional interest of 1% will be added every month.

Rate of Interest under Section 234A

Interest under section 234A is levied for delay in filing the tax return of income. Interest is levied at 1% per month or part of a month on the tax amount outstanding. The interest needs to be paid is simple interest. The taxpayer is liable to pay a simple interest at 1% per month or part of a month for delay in filing your tax return.

Period of Levy of Interest

Interest under Section 234A starts right from the date immediately following the due date of filing the income tax return, and ending on the date of furnishing the return of income. In cases where no return has been furnished, the interest starts to build up until the date of completion of the assessment under Section 144.

Amount on which Interest is to be Levied

In case of delay in filing of income tax return, interest shall be liable to pay on the amount of the tax on the total income as determined under sub-section (1) of section 143, and where a regular assessment is made, on the amount of the tax on the total income determined under regular assessment, as reduced by the amount of—

a) Advance tax, if any paid;
b) Any tax deducted or collected at source;
c) Any relief of tax allowed

Example: The tax liability of Person-A for the financial year 2019-20 is amounted to Rs. 8,400. In his case, the due date of filing the return of income is 31st July 2020. He paid a tax of Rs. 8,400 and filed his return on the 5th August 2020. Is Person-A liable to pay interest under section 234A? Yes, Person-A will be liable to pay interest under section 234A for a month at the rate of 1%, on the outstanding tax liability as he has made a delay in filing the return of income.

2. Section 234B: Interest for Defaults in Payment of Advance Tax

Interest under section 234B of the Income Tax Act is levied in two cases - 1) If the taxpayer has failed to pay advance tax, which he is liable to pay if his estimated tax liability for the year is Rs. 10,000 or more, or 2) If the advance tax paid by the taxpayer is less than 90% of the assessed tax, which is the amount of tax as calculated under section 143(1) and where regular assessment is made, the tax on the total income determined under such regular assessment.

Let’s take the example of Mr.X again, and assume that he has a payable tax amount of Rs.1,00,000. The TDS calculated is Rs.82,650. This makes the Assessed Tax (1,00,000- 82,650) = Rs.17,350. He should’ve paid a minimum of Rs.15,615 (90% of Rs.17,350) by the 30th of June, 2020. However, let’s assume he had paid only Rs.6,000 on the due date, and the rest on November 15, 2020.

Now, he will pay the following interest.

Rs.15,615 X 1% X 5 months (delay) = Rs.781 (rounded off)

Rate of Interest under Section 234B

Interest under 234B is levied for default in payment of advance tax. Interest is levied at 1% per month or part of a month. The interest needs to be paid is simple interest. The taxpayer is liable to pay a simple interest at 1% per month or part of a month for default in payment of advance tax.

Period of Levy of Interest

Interest under section 234B is levied from the first day of the assessment year (mostly from 1st April) till the date of determination of income under section 143(1) or when a regular assessment is made. In case where the income is increased basis the assessment or re-computation, the interest is levied on the differential amount from the first day of the assessment year till the date of assessment or re-computation.

Amount on which Interest is to be Levied

The taxpayer is liable to pay interest on the amount as follows:

a) If the taxpayer has failed to pay advance tax , on the amount equal to the assessed tax, or
b) If the advance tax paid by the taxpayer is less than 90% of the assessed tax, on the amount by which the advance tax paid as aforesaid falls short of the assessed tax.

Example 1: Monica’s total tax liability was Rs 50,000 in the previous year.

  • She paid her income tax on 15th July during ITR filing
  • There was no TDS deduction
  • But since her total tax liability was more than Rs 10,000, she was liable to the advance tax. However, she didn’t pay the advance tax
  • Hence, now Monica has to pay the interest u/s 234B of the Income Tax Act

Here is the amount of Interest she has to pay:

50,000 x 1% x 4 (April, May, June, July) = Rs 2,000 is the amount of interest Monica has to pay towards interest under section 234B.

Example 2: Manav had a total tax payable of Rs 50,000.

  • Out of this, he has paid Rs 44,000 on 29th March as the advance tax. He paid the remaining Rs 6,000 while filing his income tax return on 30th May.
  • Now, you can see that he has paid less than 90% of the assessed advance tax. The assessed tax is Rs 56,000, which is Rs 45,000.
  • Hence, Manav has to pay the interest under section 234B.

Here is the amount of interest he has to pay:

  • Difference between assessed advance tax: 50,000 (assessed advance tax) – Rs 44,000 (advance tax paid) = 6,000
  • Interest to be paid: 6000 x 1% x 2 (April and May) = Rs 120 is amount payable towards the interest under section 234B.

3. Section 234C: Payment of Advance Tax not on Time or Interest for Deferment of Advance Tax

Section 234C of the Income Tax Act defines the rate of interest and conditions if you delay the advance tax instalments. Everyone, including salaried taxpayers, is required to pay advance tax every quarter of the financial year.

If your advance tax instalments have been delayed you are required to pay a penalty as defined in section 234C of the Income Tax Act. Interest under section 234C is levied in case of deferment of different installments of advance tax, in following cases:

1) For taxpayers other than those who have opted for presumptive taxation scheme under section 44AD or section 44ADA, interest shall be levied-

a) If advance tax paid on or before 15th day of June is less than 12% of the tax payable on the returned income,

b) If advance tax paid on or before 15th day of September is less than 36% of the tax payable on the returned income,

c) If advance tax paid on or before 15th day of December is less than 75% of the tax payable on the returned income, and (d) If advance tax paid on or before 15th day of March is less than 100% of total tax due on returned income.

2) For taxpayers who have opted for presumptive taxation scheme under section 44AD or section 44ADA, interest shall be levied if advance tax paid on or before 15th day of March is less than 100% of tax due on returned income.

Late payment interest under this Section, too, is applied at the rate of 1% on the outstanding amount of tax, starting from the individual dates listed above, up to the payment date.

Rate of Interest under Section 234C

Interest under section 234C for default in payment of instalments of advance tax is levied at 1% per month or part of a month. The taxpayer is liable to pay a simple interest at 1% per month or part of a month for short payment/non-payment of individual’s instalments of advance tax.

Period of Levy of Interest

Interest under section 234C is levied for a period of 1 month in case of short fall in payment of the last installment and for a period of 3 months in case of short fall in payment of 1st, 2nd and 3rd instalments.

Amount on which Interest is to be Levied

The taxpayer shall liable to pay interest on the amount of shortfall of advance tax of respective individual installment, in case of shortfall therein.

How to Calculate of Interest under Section 234C?

First of all, you need to know the amount of advanced tax you need to pay every year before the due date:

Due Date Amount Payable
15th June: Up to 15% of advance tax payable
15th September: Up to 45% of advance tax payable
15th December Up to 75% of advance tax payable
15th March Up to 100% of advance tax payable

Amount of interest payable of Advance Tax under section 234C of Income Tax Act is less than the assessed amount:

Situation Amount of Interest u/s 234C of Income Tax Act
If you’ve paid Advance Tax on or before June 15: 15% of Amount* (-)tax already deposited before June 15
If you’ve paid Advance Tax on or before September 15: 45% of Amount* (-) tax already deposited before September 15
If you’ve paid Advance Tax on or before December 15: 75% of Amount* (-) tax already deposited before December 15
If you’ve paid Advance Tax on or before: 100% of Amount* (-) tax already deposited before March 15.

Calculation of Interest for Late Payment

Payment Due Dates Assessed Advance Tax Actual Advance Tax paid Difference (Cumulative) Penalty (Cumulative)
15th June 15,000 5,000 10,000 @1% x 3 x 10,000 = 300
15th September 45,000 25,000 20,000 @1% x 3 x 20,000 = 600
15th December 75,000 35,000 40,000 @1% x 3 x 40,000 = 1200
15th March 1,00,000 50,000 50,000 @1% x 1 x 50,000 = 500

Four Frequently Asked Questions on Delay/Non-Payment of Income Tax

1. What is the consequence of delay/non-payment of Income tax?

There are some interests that are urged upon the taxpayer in case there is a delay/non-payment of Income tax. The interest penalty is calculated under sections 234A, 234B and 234C of the Income Tax Act.

2. What is advance tax?

Advance tax is referred to income tax, which requires to be paid in the same year in which the income has been earned, that is in advance. Advance tax is payable if an individual’s total payable tax in a financial year is exceeds INR 10,000.

3. How is interest penalty calculated under Section 234A?

Interest Penalty = Outstanding Tax X 1% X Number of month (delayed), where fraction of a month is considered as full month. Example, if you are 4 months 10 days late, the interest will be charged for 5 months.

4. What is assessed tax?

Assessed tax is the amount of tax as calculated under section 143(1) and where regular assessment is made, the tax on the total income determined under such regular assessment.

It is important to know details about these Sections, but what is more important is keeping track of due dates and making payments on time. For reducing your tax liability, there are always life insurance and other instruments that also add value to your savings.

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