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

You need careful planning to pay your taxes and file your returns on time. You must pay hefty fines if you fail to comply with the tax rules and miss 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.

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 interests under Section 234.

Types of interest imposed under Section 234

Section 234A – for defaults in filing Income Tax Return (ITR) 2.

Section 234B – for delays in advance tax payments or incomplete payment 

Section 234C – for deferred advance tax payments

Section 234A income tax act

Each year, the tax authorities prescribe a time limit within which you must file your ITR, usually July 31. If you file after this date and have outstanding taxes, you will incur a penalty under Section 234A. 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.

234B of income tax act

This section restricts 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 ₹10,000 or more, you must 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 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. To put it 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 applicable under Section 234B

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, suppose your total tax liability for the current financial year amounts to ₹2,00,000 after all deductions and exemptions.

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

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 in the event that the income is increased as a result of the assessment or re-computation.

Section 234C

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 instalments spread over the financial year. However, if you default, you will have to pay penalty interest on the deferred payment under Section 234C.

Interest Rates 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 instalments on time. If an individual's advance tax instalments 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 instalment is not paid in full, interest under section 234C is assessed for a month, and if the first, second, and third instalments 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:

The situations for which Section 234C applies include:

The advance tax paid within June 15 is less than 12% of the assessed tax. The advance tax paid within September 15 is less than 36% of the assessed tax. The advance tax paid within December 15 is less than 75% of the assessed tax. The advance tax paid within March 15 is less than 100% of the assessed tax.

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:

For example, suppose you need to pay ₹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:
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?

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 entirely using 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 ₹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 must 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 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. Moreover, it helps you plan your tax payments as well. Hence, choosing a plan that meets your savings, insurance, and tax-planning needs is advisable and investing as soon as possible.