A chance missed or lost can lead to legal repercussions and regrets when it comes to tax compliance. This is the second part in a 3-part series about Interest imposed by the Income Tax Department.Section 234B touches upon fine and penalty that Income Tax Department can impose in case of defaulting. Liability under section 234B can also arise when there is a delay in paying advance tax.Refer to our guides for interest under Section 234A and Section 234C
- What is Advance Tax?
- Who needs to pay Advance Tax?
- Late Payment Interest under Section 234B
1. What is Advance Tax?
If you have to pay Rs 10,000 or more in taxes in a financial year, advance tax may be applicable to you. Advance Tax means paying your tax dues on the dates (usually quarterly) provided by the income tax department. If you don’t pay advance tax on time or default completely, you may be liable to pay interest under section 234B.
2. Who needs to pay Advance Tax?
All assesses including salaried employees, self-employed professionals, businessmen etc. are required to pay Advance Tax, where the tax payable even after reducing TDS already is Rs 10,000 or more.
3. Interest under Section 234B
Interest under section 234B is applicable when:
- Your tax liability after reducing TDS for the financial year is more than Rs 10,000 and you did not pay any advance tax.
In any one of the above cases, interest under section 234B shall be applicable. Interest is calculated @ 1% on Assessed Tax less Advance Tax. Part of a month is rounded off to a full month. The amount on which interest is calculated is also rounded off in such a way that any fraction of a hundred is ignored.
- You paid advance tax, but advance tax paid is less than 90% of ‘assessed tax’.
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Radhika’s total tax liability is Rs 48,000. Radhika paid this amount on 12th June while filing her return. No tax was deducted at source in her case. Radhika’s total tax liability is more than Rs 10,000, and hence she was liable to pay advance tax. As a result, Radhika will be liable to pay interest under section 234B.
Rs 48,000 x 1% x 3 (April, May, June)
= Rs 1,440
Radhika is liable to pay Rs 1,440 interest as per section 234B.
Arnav had a total tax payable of Rs 56,000, out of which Rs 48,000 was paid by him on 29th March as advance tax. The remaining balance of Rs 8,000 was paid by Arnav at the time he was filing his return on 30th May.
Even though Arnav has paid advance tax, we need to check whether he paid at least 90% of the assessed tax as advance tax or not. Assessed tax is Rs 56,000. 90% of assessed tax is Rs 50,400. However, Arnav deposited only Rs 48,000, which is less than 90% of assessed tax. Therefore, Arnav is liable to pay interest under section 234B.
56,000(assessed tax) – Rs 48,000 (advance tax)
8,000 x 1% x 2 (April and May)
= Rs 160.
Rs 160 is the interest payable under section 234B by Arnav.
Assume that the total tax Rohit needs to pay for the financial year is Rs. 1,50,000. A TDS of Rs 1,35,627 was already deducted from his income. Rohit paid Rs 5,000 on 25th March and balance of Rs 9,373 he paid at the time of filing his return on 20th July.
Let’s check whether Rohit needs to pay interest under section 234B
First let’s calculate assessed tax. Assessed tax = Rs 1,50,000 (total tax) – Rs 1,35,627 (TDS)
= Rs 14,373
Rohit 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, Rohit is liable to pay interest under section 234B
Rs 14,300(assessed tax, fraction of 100 ignored) – Rs 5000(Advance Tax) = Rs 9300
Rs 9300 x 1% x 4 months (April, May, June, July)
= Rs 372
Rs 372 is the interest payable under section 234B by Rohit.
Click to go to Part III, penalties under Section 234C
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