Income Tax

Interest Imposed by the IT Department – Section 234C

Interest Imposed by the IT Department – Section 234C

Advance tax can be defined as the income tax paid in advance for the respective income earned in a specific financial year. Generally, the tax is required to be paid when the income is generated or earned. However, the taxpayer has to estimate the income to be generated in the respective financial year according to the provision of Advance Tax.

In simpler words, Advance Tax is an income tax which is paid in advance rather than a lump sum payment paid at the end of a financial Year. It is a form of tax which allows you to pay as you earn. These respective payments are supposed to be made in installments according to the due dates set forth by the income tax department.

What is interest under section 234C

A taxpayer earning INR 10,000 or more than INR 10,000 is liable to pay advance taxes which are generally made in installments following the due dates prescribed by the Income Tax Department. When these due dates are missed by a taxpayer and one fails to pay the installment on time, then the taxpayer is penalized by the Income Tax Department under the provision of Section 234C. This penalty is imposed in the form of interest on the Installment amount left short-paid or unpaid.

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 234C of the Income Tax Act

According to Section 234C of the Income Tax Act, the Income Tax Department1 is empowered to levy interest on taxpayers for default in payment of installment of advance tax. According to section 208, each person whose estimated tax liability for a Financial Year touched or exceeds INR 10,000, is liable to pay his tax in advance as “advance tax” by following specified due dates:-

STATUSBy 15th JuneBy 15th SeptemberBy 15th DecemberBy 15th March
Taxpayers (other than those who opted for the presumptive taxation scheme of section 44AD or section 44ADA)Upto 15% of advance taxUpto 45% of advance taxUpto 75% of advance taxUpto 100% of advance tax
Taxpayers who opted for the presumptive taxation scheme of section 44AD or section 44ADANilNilNilUpto 100% of advance tax

When advance tax paid for one or more installments falls short of payment, the penalty is imposed as interest under section 234C which is levied in the following cases:-

  • In a matter of all taxpayers other than those who opted for the presumptive taxation scheme under section 44AD or section 44ADA, interest must be imposed levied-

If the advance tax paid before 15th June is lesser than 12% of the advance tax payable

If the advance tax paid before 15th September is lesser than 36% of the advance tax payable

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If the advance tax paid before 15th December is lesser than 75% of the advance tax payable

If advance tax paid before 15th March is lesser than 100% of advance tax payable

  • In matters of taxpayers specifically those who opted for the presumptive taxation scheme of Section 44AD or Section 44ADA interest should be imposed if advance tax paid before 15th March is lesser than 100% of advance tax payable.

Exceptions

No interest under Section 234C is imposed in circumstances where the shortfall in payment of advance tax is a result of the following circumstances:-

  1. failure to estimate the sum of capital gains or income referred to under section 2(24)(ix) such as winning from lotteries, crossword puzzles, etc.,
  2. Income generated from a new business,
  3. Income referred under section 115BBDA such as dividends received from a domestic company exceeds Rs. 10,00,000

However only if the taxpayer pays the respective advance tax on such generated income as a part of the following installments or till 31st March, in case no installment is pending.

Rate of interest

According to section 234C, Interest for default in the payment of installments of advance tax is levied at the rate of 1% per month or fraction of a month. This makes the nature of levied interest to be calculated in simple interest. In simpler words, the taxpayer is liable to pay simple interest at the rate of 1% per month or a fraction of a month for either short payment or non-payment of individual or collective installments of the advance tax.

Period of levy Interest

According to section 234C, Interest is imposed for a time period of 3 months in all possible cases such as in case of a shortfall in payment of the 1st, 2nd, and 3rd installment and in case of a shortfall in payment of the last installment.

Amount liable to interest under section 234C

According to section 234C, Interest is levied on the short-paid amount of installment of the advance tax.

Calculate your interest

Let’s suppose Mr. Harsh is running an Electronics shop. The tax liability of Mr. Harsh is INR 45,500. He paid the advance tax as follows:-

  • Rs. 8,000 on 15th June,
  • Rs. 11,000 on 15th September,
  • Rs. 12,000 on 15th December,
  • Rs. 14,500 on 15th March

Mr. Harsh has not opted for the presumptive taxation scheme of section 44AD. Will he be liable to pay interest under section 234C, if yes, then how much?

Ans- Any Individual whose estimated tax liability for a financial year touches or exceeds INR 10,000, is liable to pay his tax in advance in the form of “advance tax” as per the dates prescribed below (According to the amended Finance Act):

STATUSBy 15th JuneBy 15th SeptemberBy 15th DecemberBy 15th March
Taxpayers (other than those who opted for the presumptive taxation scheme of section 44AD or section 44ADA)Upto 15% of advance taxUpto 45% of advance taxUpto 75% of advance taxUpto 100% of advance tax
Taxpayers who opted for the presumptive taxation scheme of section 44AD or section 44ADANilNilNilUpto 100% of advance tax

Following the above dates, tax liability for Mr. Harsh will fall as below:-

  • In the first installment (15th June):

Tax liable to be paid = 15% of the total tax amount

= 15% of INR 45,500

= 15 x 45,500/100

= INR 6,825.

Hence, Mr. Harsh was liable to pay INR 6,825 by 15th June. However, the amount he paid is INR 8000, which is higher than the required amount. Therefore, there is no short payment in the case of the first installment.

  • In the second installment (15th September):

Tax liable to be paid = 45% of the total tax amount

= 45% of INR 45,500

= 45 x 45,500/100

= INR 20,475

Total Amount of Tax paid by Mr. Harsh till 15th September

                                                                      = 1st Installment + 2nd Installment

                                                                      = INR (8000+11000)

                                                                      = INR 19000

Mr Harsh has paid only INR 19000 whereas the tax amount was INR 20,475. This led to a short payment of INR (20475-19000) = INR 1475.

Even though there is a short payment of INR 1,475, Mr. Harsh will still not be liable to pay any interest as per section 234C as he has paid the minimum of 36% of advance tax payable by 15th September. Therefore, there is no interest levied in the case of the Second installment.

  • In the third installment (15th December):

Tax liable to be paid = 75% of the total tax amount

= 75% of INR 45,500

= 75 x 45,500/100

= INR 34,175

Total Amount of Tax paid by Mr. Harsh till 15th December

                                                      = 1st Installment+2nd Installment+3rd Installment

                                                      = INR (8000+11000+12000)

                                                      = INR 31000

Mr. Harsh has only paid INR 31000 where his minimum tax liability is INR 34,125. Therefore, there is a short payment of INR 3125 (34125-31000). Therefore, Mr. Harsh is liable to pay interest in accordance with Section 234C as a result of a shortfall of INR 3,125

  • In the last installment (15th March):

Tax liable to be paid = 100% of the total tax amount

= 100% of INR 45,500

= 100 x 45,500/100

= INR 45,500

Total Amount of Tax paid by Mr. Harsh till 15th December

                     = 1st Installment+2nd Installment+3rd Installment+4th Installment

                     = INR (8000+11000+12000+14500)

                     = INR 45000

100% of tax payable is required to be paid by 15th March. The total tax liability of INR 45,500 is paid by Mr. Harsh till 15th March which is equal to the amount required to be paid. Therefore, there is no case of short payment in the last installment. Thus, Mr. Harsh is not liable to pay any interest under section 234C in the case of the final installment.

  • Total Interest levied:

Total short-paid amount = short-paid in (1st Instalment + 2nd Instalment + 3rd Instalment + 4th Instalment) = INR 3,125

Delayed in time for entire payment (in months) (15th December to 15th March) = 3 months

Interest levied = Total short paid amount x Delayed time (months) x interest rate

= 3125 x 3 x (1%)

= 3125 x 3 x 1/100

= INR 93.75

As per the calculation, Mr. Harsh is obliged to pay the interest of INR 93.75 as a penalty under section 234C of the Indian Income Tax Act.

Conclusion

Income Tax Act set forth provision to levy interest on the defaulter taxpayers who, for any reason missed upon the payment of Installment of Advance Tax under section 234C. To avoid any penalty as interest, it is recommended that the taxpayers avoid missing the deadlines for Installment payments, or short payments of the same. In order to abide by the rules, one may check the dates specified for the payment of the Installments on the website of the Income Tax Department.

FAQs

  1. What is 234C interest as per income tax?

    According to Section 234C of the Income Tax Act, the interest is levied on the taxpayers as a penalty if the taxpayers have failed to make the payment of Installment of Advance Tax within the prescribed due date. This is applicable if the total tax amount of a taxpayer touches or exceeds the slab of INR 10,000 in a Financial Year.

  2. How is 234C interest calculated?

    Interest under Section 234C is calculated at the rate of 1% in the following manner: Outstanding taxable amount x rate of interest (1%) x no. of months (delayed).

  3. What is your interest in 234C?

    Interest according to Section 234C of the Income Tax Act, is the interest levied on the taxpayers which is a form of penalty imposed by the Income Tax Department for the missing payment of Installment of Advance Tax within the prescribed due date. This is applicable if the total tax amount of a taxpayer touches or exceeds the slab of INR 10,000 in a Financial Year

  4. What is interest 234B and 234C?

    Taxpayers are obliged to pay all kinds of taxes under the Income Tax Act according to the date specified by the Income Tax Department. Failure to abide by these dates while paying advance tax leads to a penalty levied on the defaulters in the form of Interest under Section 234B. Whereas, interest is levied on an individual under section 234C when an Individual misses the due dates of Advance Tax Installments.

  5. How to avoid 234B and 234C?

    In order to avoid interest under sections 234B and 234C, If your total tax amount in a year exceeds INR 10,000, then make sure you have been making advance tax and installment of advance tax within or on the due date specified by the Income Tax Department. Also, make sure that the paid taxes are not falling short, as falling short of paid taxes can also be subject to penalty.

  6. How to calculate 234B and 234C interest?

    Interest under Section 234B and 234C is calculated at the rate of 1% in the following manner: Outstanding taxable amount x rate of interest (1%) x no. of months (delayed).

  7. What are the rules of 234C?

    According to Section 234C of the Income Tax Act, the Taxpayers are obliged to abide by the due dates specified for payment of Advance Tax Installments. Once a taxpayer fails to abide by the due dates and pays the advance tax installments later than the date, Interest is imposed on the taxpayer as a penalty at the rate of 1%.

  8. What are the exceptions to 234C?

    No interest under Section 234C is imposed in circumstances where the shortfall in payment of advance tax is a result of failure to estimate the sum of capital gains or income referred to under Section 2(24)(ix) such as winning from lotteries, crossword puzzle, etc., or Income generated from a new business, or Income referred under section 115BBDA such as dividend received from a domestic company exceeds Rs. 10,00,000, and the taxpayer pays the respective advance tax on such generated income as a part of following installments or till 31st March, in case no installment is pending.

  9. What is the exemption to Section 234C?

    The exemption to section 234C includes all such missing payment of advance tax which is a result of failure to estimate the sum of capital gains or income referred under section 2(24)(ix) such as winning from lotteries, crossword puzzles, etc., or Income generated from a new business, or Income referred under section 115BBDA such as dividend received from a domestic company exceeds Rs. 10,00,000, and the taxpayer pays the respective advance tax on such generated income as a part of following installments or till 31st March, in case no installment is pending.

  10. What is the exemption of 234C?

    The exemption of section 234C includes certain circumstances where missing payment of advance tax does not result in interest being levied. Such cases are failure to estimate the sum of capital gains or income referred under section 2(24)(ix) such as winning from lotteries, crossword puzzles, etc., or Income generated from a new business, or Income referred under section 115BBDA such as dividend received from a domestic company exceeds Rs. 10,00,000, and the taxpayer pays the respective advance tax on such generated income as a part of following installments or till 31st March, in case no installment is pending.

  11. How to avoid 234C?

    In order to avoid interest under section 234C, if your total tax amount in a year exceeds INR 10,000, then make sure you have been making payment6 of installment of advance tax within or on the due date specified by the Income Tax Department. Also, make sure that the paid taxes are not falling short, as falling short of paid taxes can also be subject to penalty.

  12. What is the limit of 234C?

    Section 234C has its limitations. In certain scenarios, the payment of advance tax falling short is not subject to interest levied. Such cases are failure to estimate the sum of capital gains or income referred under section 2(24)(ix) such as winning from lotteries, crossword puzzles, etc., or Income generated from a new business, or Income referred under section 115BBDA such as dividend received from a domestic company exceeds Rs. 10,00,000, and the taxpayer pays the respective advance tax on such generated income as a part of following installments or till 31st March, in case no installment is pending.

  13. Who is exempt from paying advance tax?

    An Individual whose total tax amount in a financial year does not exceed the slab of INR 10,000 is exempted from paying advance tax under the Income Tax Act.

  14. Is 234B and 234C applicable to salaried employees?

    Yes, 234B and 234C apply to all forms of taxpayers inclusive of businessmen, salaried individuals, exporters, etc.

  15. How do I pay advance tax to avoid interest?

    In order to avoid interest under section 234C, if your total tax amount in a year exceeds INR 10,000, then make sure you have been making payment of advance tax and installment of advance tax within or on the due date specified by the Income Tax Department. Also, make sure that the paid taxes are not falling short, as falling short of paid taxes can also be subject to penalty.

References

  1. https://incometaxindia.gov.in/Pages/default.aspx
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