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Interest Imposed Under Sections 234A, 234B and 234C

Understanding how interest penalties accrue under Sections 234A, 234B, and 234C of the Income Tax Act can prevent confusion if you ever experience a delay in tax payments.

  • 40,144 Views | Updated on: Mar 20, 2024

Sections 234A, 234B, and 234C of the Income Tax Act, 1961 deal with different scenarios where interest is charged on tax liabilities in India. Section 234A of the Income Tax Act applies to the late filing of income tax returns. The interest rate of 1% per month or part of a month on the outstanding tax amount is applied.

Section 234B applies to default in payment of advance tax installments and comes with an interest rate of 1% per month or part of a month on the outstanding advance tax installment. Section 234C applies to the failure to pay tax liability even after assessment by the Income Tax Department. It imposes a tax at the interest rate of 12% per annum on the outstanding tax liability.

Taxpayers need careful planning to pay taxes and file their returns on time. One must pay hefty fines if one fails to comply with the tax rules and misses the due dates for tax payment and filing. The penalties are calculated as interest on your outstanding tax amount based on Section 234 of the Income Tax Act, 1961.

Section 234A of the Income Tax Act

Each year, the Income Tax Act sets specific deadlines for filing tax returns (Section 139). Failing to meet these deadlines has serious repercussions, including potential interest penalties under Section 234. In addition, you will have to pay an interest of 1% or part of the month on the unpaid tax amount. The interest will be levied for the period from the due date for filing your return until the date when you file it.

Interest Rates Under Section 234A

Incentives are assessed under Section 234A for late filing of an income tax return. On the unpaid tax balance, interest is charged at a rate of 1% per month or a fraction thereof. Simple interest is the type of interest that must be paid. For each month or fraction of a month that your tax return is late, the taxpayer is responsible for paying a simple interest charge of 1%.

Duration of Interest Levy

Interest under Section 234A accrues beginning on the day after the income tax return is due and ends on the day the return of income is furnished. When a return has not been provided, interest accrues until the day the assessment under Section 144 is finished.

For example, you fail to file the tax return and have to pay ₹1,00,000 as tax. You pay and submit your ITR after three months from the stipulated date. The 1% simple interest for those three months on the due amount of ₹1,00,000 will be,

1,00,000 X 3% = ₹3,000

Hence, you will have to pay ₹1,03,000.

Section 234B of the Income Tax Act

234B section restricts the penalty imposed in case of delays in paying advance tax. Advance tax involves paying your payable tax amount in quarterly installments on due dates defined by the income tax department. You must pay advance tax if your tax liability in a financial year amounts to ₹10,000 or more.

Taxpayers who need to pay advance tax include business owners, salaried employees, and self-employed professionals. However, taxpayers opting for tax calculation on income from businesses having 8% turnover on a presumptive basis are exempt from paying advance tax.

Interest Rates Under Section 234B

Section 234B imposes interest of 1% per month or fraction thereof for failure to pay advance tax. Simple interest is the nature of interest. Put another way, the taxpayer is responsible for paying simple interest at a rate of 1% per month or fraction thereof for failure to pay advance tax. Interest under this section applies if your payable tax amount after paying TDS exceeds ₹10,000, but you did not pay any advance tax. The advance tax you paid is less than 90% of your ‘assessed tax.’

In either of these cases, you have to pay 1% interest on your assessed tax amount, rounded off to the nearest hundred, less the advance tax you already paid.

For example, if your total tax liability for the current financial year amounts to ₹2,00,000 after all deductions and exemptions. The following scenarios will arise:

Scenario A - TDS of ₹1,20,000 got deducted from this sum:

Your assessed tax is ₹(2,00,000 –1,20,000) = ₹80,000.

Hence, you had to pay at least 90% of this balance amount of ₹80,000 as advance tax, which equals ₹72,000.

But you paid only ₹50,000 within the last payment date and the remaining ₹30,000 five months after the deadline.

Therefore, as per Section 234B, you must pay penalty interest on your assessed tax amount of ₹80,000 minus the ₹50,000 advance tax you paid.

Hence, your penalty equals to ₹(80,000 – 50,000) X 1% X 5 = ₹1,500.

Scenario B - You paid no advance tax at all:

Your penalty would be ₹80,000 X1% X 5 = ₹4,000.

Scenario C - No TDS has been deducted, and you failed to pay any advance tax as well:

You will have to pay ₹2,00,000 X 1% X 5 = ₹10,000.

Scenario D - Your income was not subject to TDS:

Therefore, your payable tax is ₹2,00,000.

90% of this amount is ₹1,80,000. Therefore, the advance tax you paid, ₹50,000, is less than this sum.

Therefore, the 1% interest applies to ₹2,00,000 (assessed total tax) – ₹50,000 (advance tax paid) = ₹1,50,000.

Hence, in this case, the penalty = ₹1,50,000 X 1% X 5 = ₹7,500.

Duration of Interest Levy for Section 234B

Interest under section 234B is assessed beginning on the first day of the assessment year (often on April 1) and continuing until the date on which section 143(1) income is determined or until a regular assessment is conducted. Interest is charged on the differential amount from the first day of the assessment year until the date of assessment or re-computation if the income is increased due to the assessment or re-computation.

Section 234C of the Income Tax Act and Interest Rates Under it

The tax authorities try to relax the income tax burden through various tax reliefs and facilities. One such facility is the convenience of paying advance tax in four installments spread over the financial year. However, if you default, you will have to pay penalty interest on the deferred payment under Section 234C.

Interest is assessed under section 234C at 1% per month or a fraction of a month for failure to pay advance tax installments on time. If an individual’s advance tax installments are not paid in full or are paid late, the taxpayer is responsible for paying simple interest at a rate of 1% per month or a fraction thereof.

Duration of Interest Levy

If the final installment is not paid in full, interest under section 234C is assessed for a month, and if the first, second, and third installments are not paid in full, interest is assessed for three months.

The tax department has assigned the following schedule for the payment of advance tax:

Due Date

Advance tax payable for all taxpayers

other than assesses opting for

presumptive income under Section 44AD

Advance tax payable for

taxpayers opting for the

presumptive income scheme

under Section 44AD

June 15

Up to 15% of the total amount payable

NIL

September 15

Up to 45% of the total amount payable

NIL

December 15

Up to 75% of the total amount payable

NIL

March 15

Up to 100% of the total amount owed

100% advance tax payable

Situations Where Section 234C is Applicable

If you default, the penalty interest you must pay is 1% of the outstanding advance tax amount. The interest is calculated from the respective cut-off dates for every financial quarter up to the date you pay the due amount.

Interest calculation under Section 234C for taxpayers not opting for the Section 44AD presumptive income scheme:

Outstanding Amount

Rate of interest chargeable per month (Simple Interest)

Period of Interest

Amount on which interest is levied

Less than 15% of the total advance tax due paid on or before June 15

1%

3 months

15% of the total advance tax–actual amount deposited within June 15

Less than 45% of the total advance tax due paid on or before September 15

1%

3 months

45% of the total advance tax–actual amount deposited within September 15

Less than 75% of the total advance tax due paid on or before December 15

1%

3 months

75% of the total advance tax–actual amount deposited within December 15

Less than 100% of the total advance tax due paid on or before March 15

1%

100% of the total advance tax–actual amount deposited within March 15

For example, suppose you must pay ₹2,00,000 in advance tax. It is payable in four installments, as described in the table above. But you pay only part of the actual amounts due per installment. Then, the penalty charged will be as follows:

Payment due date

Advance tax payable

Actual tax paid

Deficit (Cumulative)

Penalty applicable (Cumulative)

June 15

30,000

10,000

20,000

@1% X 3 X 20,000 = 600

September 15

90,000

50,000

40,000

@1% X 3 X 40,000=1,200

December 15

1,50,000

70,000

80,000

@1% X 3 X 80,000=2,400

March 15

2,00,000

1,00,000

1,00,000

1% X 1 X 1,00,000=1,000

Therefore, the total interest payable is ₹5,200. However, you need not pay any penalty if any deficit crops up due to an incorrect estimation of capital gains or speculative income from the lottery, gambling, etc.

How to Avoid Penalty Payments?

To avoid penalty payments for sections 234A, 234B, and 234C of the Income Tax Act, here are some key steps:

For Section 234A

  • File your return on time: The due date for filing your return depends on your income range and tax liability. Generally, it’s July 31st for Individuals and December 31st for Companies. Aim to file before the deadline to avoid any penalties.
  • Pay your taxes in full: Ensure you pay all outstanding taxes by the due date, along with any applicable interest calculated from the return’s original due date.
  • File revised returns (if applicable): If you discover inaccuracies after filing, file a revised return before the completion of assessment proceedings.

For section 234B

  • Pay advance tax installments: Pay your advance tax installments on time throughout the year, as per the prescribed dates (June 15, September 15, December 15, and March 15).
  • Meet the minimum percentage: Ensure your advance tax installments add up to at least the specified percentage of your total tax liability based on your income category. For most individuals, it’s 75% by December 15th and 100% by March 15th.
  • Pay any shortfall: If you paid less than the required advance tax, pay the balance with interest promptly to avoid further penalties.

For Section 234C

  • Avoid deferment: This option attracts higher interest rates than regular advance tax. Use it only if absolutely necessary.
  • Pay deferred amount promptly: If you have opted for deferred payment, ensure you pay the remaining advance tax and applicable interest by the stipulated date (1st October).

Summing it Up

Taxpayers must embrace diligence to avoid the pitfalls of Sections 234A, 234B, and 234C. Timely filing, full tax payments, and adherence to prescribed advance tax schedules are essential. Filing revised returns when necessary and avoiding unnecessary deferment can safeguard against penalties. As taxpayers navigate these complexities, sticking to these key steps becomes not just a necessity but vital for fiscal responsibility.

Key Takeaways

  • Failure to meet tax return deadlines leads to interest penalties under Section 234A of the Income Tax Act 1961.
  • Taxpayers with a tax liability of ₹10,000 or more in a financial year must pay advance tax in quarterly installments.
  • Taxpayers can pay advance tax in four installments, and failure to do so attracts penalty interest under Section 234C.
  • To avoid penalty payments, you must file returns on time, meeting the specified deadlines to avoid penalties under Sections 234A, 234B, and 234.

- A Consumer Education Initiative series by Kotak Life

Amit Raje
Written By :
Amit Raje

Amit Raje is an experienced marketer who has worked in various Fintechs and leading Financial companies in India. With focused experience in Digital, Amit has pioneered multiple digital commerce in India. Now, close to two decades later, he is the vice president and head of the D2C business department. He masters the skill of strategic management, also being certified in it from IIMA. He has challenged his challenges and contributed his efforts in this journey of digital transformation.

Amit Raje
Reviewed By :
Prasad Pimple

Prasad Pimple has a decade-long experience in the Life insurance sector and as EVP, Kotak Life heads Digital Business. He is responsible for developing user friendly product journeys, creating consumer awareness and helping consumers in identifying need for life insurance solutions. He has 20+ years of experience in creating and building business verticals across Insurance, Telecom and Banking sectors

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