Interest Penalty Imposed Under Section 234A, 234B and 234C Explained

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

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  • 26th Mar 2021
  • 2,703

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

You need careful planning to pay your taxes and file your returns on time. If you fail to comply with the tax rules and miss the due dates for tax payment and filing, you have to pay hefty fines. The fines are calculated as interests on your outstanding tax amount based on Section 234 of the Income Tax Act, 1961.

If you have forgotten to pay or file taxes within the due dates, you need to learn how to calculate the penalty interest. But first, you need to know the various types of interests applicable under Section 234.

Types of interest imposed under Section 234

1.Section 234A – for defaults in filing Income Tax Return (ITR) 2.Section 234B – for delays in Advance tax payments or for incomplete payment 3.Section 234C – for deferred Advance tax payments

Section 234A

Each year the tax authorities prescribe a time limit within which you need to file your ITR, usually July 31. If you file after this date and have outstanding taxes, you will incur a penalty under Section 234A. You will have to pay an interest of 1% per month 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.

For example, suppose you fail to file the tax return and have to pay Rs. 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 Rs. 1,0,000 will be

1,00,000 X 3% = Rs. 3,000

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

Section 234B

This section demarcates the penalty imposed in case of delays in paying advance tax.

What is advance tax?

Advance tax involves paying your payable tax amount in quarterly instalments on due dates defined by the income tax department. If your tax liability in a financial year amounts to Rs. 10,000 or more, you have to pay advance tax.

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 applicable under Section 234B

Interest under this section applies if:

  • Your payable tax amount after paying TDS exceeds Rs. 10,000 but you did not pay any advance tax.
  • The advance tax you paid is less than 90% of your ‘assessed tax’.
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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, suppose your total tax liability for the current financial year amounts to Rs. 2,00,000 after all deductions and exemptions.

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

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

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

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

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

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

Scenario B - You paid no advance tax at all:

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

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

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

Scenario D - Your income was not subject to TDS:

Your payable tax is Rs. 2,00,000.

90% of this amount is Rs. 1,80,000. The advance tax you paid, Rs. 50,000, is less than this sum.

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

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

Section 234C

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

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 payable 100% advance tax payable

The situations for which Section 234C applies include:

  • Total advance tax paid within June 15 is less than 12% of the assessed tax.
  • Total advance tax paid within September 15 is less than 36% of the assessed tax.
  • Total advance tax paid within December 15 is less than 75% of the assessed tax.
  • Total advance tax paid within March 15 is less than 100% of the assessed tax.
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If you default, the penalty interest you have to pay is set at 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 /td> 1% 100% of the total advance tax –actual amount deposited within March 15

For example, suppose you need to pay Rs. 2,00,000 in total as advance tax. It is payable in four instalments as described in the table above. But you pay only part of the actual amounts due per instalment. 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 Rs 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 lottery, gambling, etc.

How to avoid penalty payments?

Timely tax payments and return filing are the only ways to avoid such fines. However, sometimes, arranging for the lump-sum tax amount can be challenging. In such cases, tax defaults and deficits might occur.

One way out of such predicaments is to lower your tax burden by making full use of the available tax deductions. Section 80C offers the maximum tax break on investing in specific tax-deductible financial instruments, such as life insurance.

You can claim deductions up to Rs. 1.5 lakhs for the premiums paid towards your life insurance policy every financial year. However, tax savings should not be the only reason for buying life insurance. You need to select a plan that aligns with your investment targets and long-term financial goals.

Kotak Life offers a wide range of life insurance plans catering to various investment and insurance needs, such as:

  • Savings for the future
  • Wealth creation to fund life goals
  • Creating retirement funds for financial freedom in advanced age
  • Funding children’s higher education
  • Income replacement to safeguard loved ones against financial shortfalls in case of an unfortunate event

You can study the features of the different policies online and get instant quotes on the premiums payable. It helps you plan your tax payments as well. Hence, it is advisable to choose a plan that meets your savings, insurance, and tax-planning needs, and invest as soon as possible.

- A Consumer Education Initiative series by Kotak Life

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