Income Tax

Interest Imposed by the IT Department – Section 234B

According to the Indian Income Tax Act, Taxpayers falls under the surveillance of Section 234, which requires taxpayers to pay all kind of taxes within or on time. When such obligation is missed upon for any reason, partially or completely, the taxpayers are penalized in the form of interest levied on the respective amount. One such interest is Levied under Section 234B of the Act, which comes into play when a taxpayer fails to pay the advance taxes for any reason, partially or completely. In this article, we have tried to measure all the ropes of Section 234B.

What is Advance Tax?

Advance tax can be defined as those taxes in the income tax, which is paid in advance for the income earned in a particular financial year. Generally, the taxes are to be paid when the income is made. However, as per the advance tax provisions, the taxpayers have to estimate the income for the respective financial year. For Taxpayers whose gross taxes in a financial year are raised to be INR 10,000 or higher than INR 10,000, Advance Tax comes into action, making the taxpayer eligible to pay them following the due dates.

What is interest under section 234B

Advance Tax payment is an obligation under the Income Tax Act¹. This obligation is required to be fulfilled before or on the specified due date. When a taxpayer fails to oblige the compliance, the respective taxpayer is subject to penalty by the Indian Government for such failure under the Indian Income Tax Act by virtue of Section 234B. This section brings the Taxpayer under the umbrella of penalty in the form of Interest, which is imposed on the total taxable income (left after deductions). These interests are paid along with the taxes as a form of penalty.

What are the types of interest?

There are 3 different types of interest provisioned under section 234:

• Delayed filing of Income Tax Returns – Section 234A
• Delayed payment of Advance Tax – Section 234B
• Deferred Payment of Advance Tax – Section 234C

Sneak-peak into section 234B of the Income Tax Act

Section 234B of the Indian Income Tax Act provides for the imposition of interest as a form of penalty for default in payment of advance tax. According to section 234B, interest is imposed in the following two cases:

a) In circumstances where the taxpayer has failed or failed to pay advance taxes even though he is liable to pay such advance taxes or

b) In circumstances where the taxpayer has paid the advance taxes but the taxes he paid are less than 90% of the gross assessed tax (assessed tax is discussed later). According to Section 208 of the Indian Income Tax Act, advance tax should be paid by the taxpayer during the financial year in case the taxpayer’s estimated tax liability during the respective financial year is INR 10,000 or more than INR 10,000.

Rate of interest

According to section 234B of the Indian Income Tax Act, interest imposed due to default in payment of advance tax is at the rate of 1% per month or a fraction of a month. The Interest is calculated in the form of simple interest. In simpler words, the taxpayer is obliged to pay simple interest at the rate of 1% per month or a fraction of a month for the respective default in payment of advance tax.

Period of levy Interest

• As per section 234B, interest is imposed from the first day of the assessment year, which is from 1st April, and ends at the date of determination of income as per section 143(1) or in the case of a regular assessment made, then by the end of such a regular assessment.
• In a scenario where the income is enhanced due to the assessment or re-computation of such, interest shall be levied as per section 234B on the differential amount till the date of assessment or re-computation beginning from the first day of the assessment year.
• In the case of an application made to the Settlement Commission, as per section 234B, interest will be imposed on the differential amount until the application is filed from the first day of the assessment year. Moreover, suppose the Settlement Commission has increased the respective income as specified in the application. In that case, interest will be imposed on the differential sum from day one of the assessment year ending on the date of such order under section 234B.
• If the income is decreased or increased as a result of a rectification order made by the Settlement Commission, interest will also be increased/decreased accordingly as per section 234B.
• In circumstances where the taxpayer has made any payment of any tax before the closing of assessment, then the interest will be levied as per section 234Bin the following manner:

(a) Interest will be calculated on the sum of unpaid/short-paid advance taxes up to the date of payment made for self-assessment tax,  

(b) Interest will be imposed on the unpaid/short-paid amount of advance tax after the deduction of the self-assessment tax paid by the taxpayer from the date of payment made for the self-assessment tax.

Amount liable to interest under section 234B

According to section 234B of the Indian Income Tax Act, Interest is imposed on the sum of unpaid advance taxes. In a case where the taxpayer makes a shortfall in the payment of advance taxes, the interest is imposed on the sum by which advance taxes are short-paid. The sum of unpaid/short-paid advance tax is calculated as follows:

Particulars	Amount
Assessed Taxes	XX
Less: Advanced paid taxes (if any)	XX
Amount of short paid /unpaid advance tax	XX

1. Assessed taxes means the gross sum of tax which has been determined to be paid according to section 143(1)
2. Where a regular assessment is done, the tax on gross income is calculated under such regular assessment as reduced by relief/deduction of tax claimed under various sections like sections 89/90/90A/91, tax deducted/collected at source, and tax credit claimed under section 115JAA/115JD. Tax on gross income calculated under section 143(1) should not involve the additional income tax, if any, to be payable as per section 140B or section 143, and tax on gross income calculated under regular assessment should not involve the additional income-tax payable under section 140B of the Indian Income Tax Act.

Calculate your interest

Mr. Mihir is a businessman. Therefore, his tax liabilities calculated under section 143(1) are INR 28,400. Mr Mihir did not pay any advance taxes; however, his account has a TDS credit of INR 10,000. While filing the Income Tax Return, following the due date, he made the payment for the balance tax on 31st July (the due date for filing the ITR). Is he holding any liability to pay interest as per section 234B? If yes, then how much?

Ans- In this case, Mr Mihir is liable to pay Interest. Let’s understand how.

Mr. Mihir’s total Tax Liability                             = INR 28,400

TDS credited in the account                                = INR 10,000

The tax liability (after allowing credit of TDS) = Total Tax liability – TDS credited

                                                                                   = INR 28,400 – INR 10,000

                                                                                   =INR 18,400

The tax liability (after allowing credit of TDS) amounts to INR 18,400, which exceeds INR 10,000. Therefore, Mr. Mihir was eligible to pay advance tax. As a matter of fact, Mr Mihir did not pay any advance tax, and hence, he is liable to pay interest imposed under section 234B for non-payment of Advance Taxes.

According to section 234B, Interest is eligible to be levied at the rate of 1% per month or for a fraction of the month. In this case, Mr Mihir made the payment of the outstanding tax on 31st July. Therefore, interest (under section 234B, as amended by Finance Act, 2023) will be imposed for the period starting from 1st April to 31st July, computed to a total of 4 months. Interest will be imposed on the unpaid tax liability of INR 18,400.

Interest Imposed (at the rate of 1%)

                                = Taxable amount x No. of months x rate of Interest/100

                                = 18,400 x 4 x 1/100

                                = INR 736

Conclusion

In the matter of paying taxes of any form, it is always recommended that taxpayers pay taxes before the due date so that if any error occurs, the taxpayer has time to correct the error without being levied with a penalty. When, as a taxpayer, you missed upon paying your advance taxes and have been imposed with interest as a token of penalty, make sure that all of the aforementioned requirements are subject to fulfilment. Moreover, you may calculate your levied interest on your own for your respective tax amount.

FAQs

1. https://incometaxindia.gov.in/pages/acts/income-tax-act.aspx