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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
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.
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:
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.
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:
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:
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.
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