Interest Imposed By The IT Department - Section 234B

Section 234B touches upon fines and penalties that the income tax department can impose in case of a default. Liability under section 234B can also arise when there is a delay in paying advance tax. Section 234B interest calculation starts from the end of the financial year, i.e. for FY 2023-24 interest u/s 234B will be start from 1st April 2024. Refer to our guides for interest under Section 234A and Section 234C. 

What is an 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 due dates provided by the income tax department. Advance tax is also known as ‘pay-as-you-earn’ tax. If you don’t pay advance tax on time or default completely, you may be liable to pay interest under section 234B.

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/TCS/Relief under section 89 and 90 is Rs 10,000 or more.  

What is assessed tax?

Assessed tax is the total income tax on taxable income less the following deductions:

• Tax deducted at the source, tax collected at the source
• Tax relief or deduction, such as sections 89, 90, and so on
• Tax credit under sections 115JAA/115JD

Interest under Section 234B: Default in Payment of Advance Tax

Interest under section 234B is applicable when:

• Your tax liability after reducing TDS/TCS/Relief under section 89 and 90 for the financial year is more than Rs 10,000 and you did not pay any advance tax.
• You paid advance tax, but amount paid is less than 90% of ‘assessed tax’.
• If the taxpayer files an updated ITR, the amount of advance tax paid is lowered only once for calculating the interest payable under section 234B (inserted in Budget 2023).

In the above cases, interest under section 234B shall be applicable. Interest is calculated at 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.

Examples

Example 1: 
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. 

Interest calculation:
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.

Example 2: 
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. 

Interest calculation 
56,000(assessed tax) – Rs 48,000 (advance tax) = 8,000. Since 90% of assessed tax is not paid , Interest u/s 234B will be computed as follows

 8,000 x 1% x 2 (April and May) = Rs 160. Rs 160 is the interest payable under section 234B by Arnav.

Example 3: 
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 

Interest calculation 
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.

Related Articles

Interest Imposed by the IT Department on delay of advance tax payment – Section 234A

Interest Imposed by the IT Department on default of advance tax – Section 234C