Income Tax

Section 234B: Interest for Defaults in Payment Of Advance Tax

Section 234B

Advance tax refers to the payment of the tax liability before the end of the relevant financial year (FY) to the income tax department. Advance tax is also known as pay-as-you-earn tax. Every assessee must make the payment of an advance tax if the total tax payable is exceeding Rs 10000 in a financial year. For this purpose, the income tax department has specified the due dates for payment of advance tax. Default in payment of this type of tax leads to interest under Section 234B of the Income Tax Act 1961[1] (ITA), and this provision of the ITA shall be discussed in detail in the present article. 

Persons Eligible for Payment of Advance Tax

Every assessee, the total tax liability of whom is more than Rs 10000 post the deduction of TDS/ TCS, is liable for payment of advance tax. Here, the assessee includes salaried employees, self-employed professionals, self-employed businesses, companies, partnership firms, assessees opting for presumptive tax schemes, and so on. However, a resident senior citizen without any income under the head ‘Income from Business and Profession’ is exempt from advance tax. The senior citizen is a person of more than 60 years of age. 

Section 234B: Meaning

Section 234B provides for the imposition of interest for default in payment of advance tax. Interest under this section is imposed in the following two cases:

  • Failure of the assesse towards the payment of advance tax despite him being liable for the payment of the same.
  • The advance tax which the assesse has paidis less than 90% of the assessed tax.
  • According to Section 208 of the Act, advance tax shall be payable by the assessee during the FY if the estimated tax liability of the assessee during that year is Rs 10,000 or more.
  • There has been a reduction in the amount of advance tax paid only once for computing the interest payable u/s 234B if the assessee files an updated ITR. (Inserted with Budget 2023)
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The above-mentioned criteria can be better understood through the following examples- 

Failure of the assesse towards the payment of advance tax despite him being liable for the payment of the same.

Mr A is an individual who is a salaried employee. His total assessed tax liability for the FY amount to Rs 23,000. There isn’t any TDS deduction. He hasn’t paid any tax before 31st March. He pays the entire tax liability of Rs 23,000 at the time of filing his income tax return (ITR)   

He would be liable for the payment of interest under section 234B of the ITA  for the following reasons:

  • He was liable to pay advance tax because his total tax payable was more than Rs 10,000 for the financial year
  • He didn’t make the payment of the advance tax before the end of the FY, i.e. 31st March
  • The assessee makes the payment of the advance tax, but the amount paid by him/ her is less than 90% of the assessed tax.

Illustration -1 Payment of more than 90% of tax

The tax liability of MrX for the FY is Rs 40,000. He pays Rs 38,000 before 31st March. The balance tax of Rs 2,000 he pays at the time of filing the income tax return (ITR).

The % of tax paid by MrX is 95% [(38000/40000)*100]. Mr X has made the payment of 95% of the advance tax, which is more than 90%. Hence, interest under this section isn’t applicable. 

Illustration -2 Payment <90% of tax

The tax liability of Mr Y for the financial year is Rs 60,000. He pays Rs 51,000 before 31st March. The balance tax of Rs 9,000 he pays while filing the income tax return.

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The percentage of tax paid by Mr Y  is 85% [(51000/60000)*100]. The quantum of the advance paid by Mr Y is before 31st March <90% of the total assessed tax. Hence, Mr Y will be liable for the payment of interest under section 234B of the income tax act.

Rate of Interest under Section 234B of the Income Tax Act

This section provides for interest for default in advance tax payment at a rate of interest of 1% / month or part of the month. The nature of interest is simple interest.

Amount of Interest Under Section 234B Of the Income Tax Act

Interest at the rate of 1% / month or part of a month is imposed on the amount of unpaid advance tax. In case of a shortfall in payment of advance tax, the interest is imposed on the amount by which advance tax is short-paid.

The amount of unpaid advance tax or short payment of advance tax in the following method:

ParticularsAmount
Assessed tax for the financial yearXXX
Less: Advance tax paid earlierXXX

Assessed Tax: Meaning

Assessed tax means the total income tax on the taxable income minus the following:

  • Tax deducted at source(TDS)  or tax collected at source (TCS)
  • Relief of tax or deduction of tax like section 89, section 90, and so on
  • Tax credit under section 115JAA/115JD

Period of Levy of Interest Under Section 234B Of the Income Tax Act

The interest is imposed from the 1stday of the assessment year  (AY) till the date of a regular assessment or an assessment under section 143(1)

Case-1 Assessee hasn’t paid any tax during the financial year

Mr S has a total tax liability of Rs 30,000 for the FY 2019-20. He does not have any TDS credit as well. The payment of the entire tax is made by him at the time of filing the income tax return, i.e. 27th June 2020. 

He is liable for the payment of advance tax since the total tax amount exceeds Rs 10000 for the FY. The interest chargeable under this section will be computed for 3 months,i.e. April, May, and June being part of the month. The interest amount will be Rs 900 (Rs 30000 * 1% * 3).

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Case-2 Assessee pays advance tax less than 90% 

MrR has a total tax liability of Rs 50,000 for the FY 2019-20. He paid Rs 42,500 on 27th March 2020. The rest of the tax amounting to Rs 7500 is paid by him at the time of filing the return of income, i.e. 27th June 2020. 

Here, we first need to check whether the tax paid by the assessee on 27th June 2020 amounts to 90% of the assessed tax of Rs 50,000. Here, 90% of the assessed tax liability is Rs 45,000 (Rs 50,000 * 90%). Since the assessee pays less than 90% of the total tax liability, he will have to pay interest under sec 234B. The interest will be charged here for 3 months, i.e. April, May, and June being part of the month. The interest amount will be assessed tax – advance tax paid * 1% * 3 months, i.e. Rs 225 (Rs 50000 – Rs 42500 * 1% * 3).

Case-3 Assessee pays advance tax less than 90% and has a tax credit

Mr T has a total tax liability of Rs 1,70,000 for the FY 2019-20. The total TDS deducted from his income during the year was Rs 1,12,000. He paid Rs 30,000 on 27th March 2020. He pays the balance tax of Rs 28,000  while filing the income tax return, i.e. 27th June 2020.

The first thing which must be checked is whether there is a need for Mr T  to make the payment of advance tax or not. Firstly, we need to calculate the assessed tax. Here, assessed tax = total tax of Rs 1,70,000 minus TDS of Rs 1,12,000, i.e. Rs 58,000. Mr T  should have paid at least 90% of the assessed tax, i.e. 90% of Rs 58,000 = Rs 52,200, before 31st March. However, he paid only Rs 30,000. He is liable for payment of interest under this section

Section 234B Interest payable = (assessed tax – advance tax) * 1% * 3 months 

                           = (Rs 58,000 – Rs 30,000) * 1% * 3 months 

                           = Rs 840

Conclusion

For the purpose of ensuring tax compliance, it is important for every assessment to have a thorough knowledge of the provisions of Sections 234B in order to avoid penalties by way of interest. The assessed can also seek guidance from professionals having expertise in taxation to avoid confusion with regards to the same.

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