Interest imposed under Section 234A, 234B and 234C, explained

May 09, 2018 | 7 months ago | Read Time: 4 minutes | By iKnowledge Team

Interest imposed under Section 234A, 234B and 234C, explained

One-line Description:  While income tax payment should be paid before the due date, it’s important to understand the types of interest that you may have to incur in case of late payment.

Advance tax is usually payable when your tax liability exceeds Rs. 10,000 in a financial year. With tax planning, you can pay your taxes on time. However, if you forget or delay the payment, you are penalized in the form of interest under section 234B of the Income Tax Act. You also must pay similar penalties under section 234A and 234C. Here’s a lowdown of the three types of interest that you may have to cough up if you have defaulted:

Interest imposed under Section 234A:

Interest under section 234A is imposed when there’s a delay in filing income tax returns. Are you always late on filing your income tax returns? If yes, you may be in danger of attracting this penalty. The due date for filing the returns is usually before July 31 of every following assessment year. Under this Section, interest is charged at 1 % on the outstanding tax amount and must be paid from the first day after the due date of filing the return until the date of the actual filing of the return.

Calculating interest penalty under 234A:

For instance, Geeta has a total tax outstanding of Rs. 3,00,000 (Including net advance tax and TDS) Instead of filing her returns on July 31, she files it on January 15. She is now late by 6 months on the tax payment. Here’s how much she’s liable to pay:

Interest = 3,00,000 X 1% X 6 = 18000

Geeta will now have to pay Rs. 18,000 after the tax amount. The interest will continue until March 31st that is the end of the assessment year.

Interest imposed under Section 234B:

Interest under section 234B is imposed if you make incomplete tax payments. It is also levied in case of a delay in the payment of advance tax. You must pay interest under Section 234B if you are liable to pay advance tax but have failed to do so. However, it is also imposed if you have paid advance tax but the amount is less than 90% of the assessed tax.

Calculating interest penalty under 234B of the Income Tax Act:

Let’s say Priya must pay a total tax of Rs. 2,00,000 for the current fiscal year. The TDS deduction amounted to Rs. 1,82,650. On March 25, Priya paid Rs. 7,000 while the balance amount of Rs. 10,350 was paid on July 20. Let’s calculate the penalty now:

Assessed tax = Total Tax – TDS

= Rs. 2,00,000 – Rs. 1,82,650

= Rs. 17,350

Priya should have paid at least 90% of Rs. 17,350 which amounts to Rs. 15,615, on March 31. However, Priya only made a payment of Rs. 7,000. Hence Priya will have to pay an interest penalty on the assessed tax.

So Priya has to pay:

Rs. 15,600 (rounded figure) x 1% x 4 months (calculated till July) = Rs. 624.

Hence Priya is liable to pay Rs. 624, as a penalty on the interest of the assessed tax, under Section 234B.

Interest imposed under Section 234C:

Interest under section 234C is imposed when there is a delay in payment of an instalment of advance tax.

You pay interest under Section 234C if,

  1. Advance Tax is paid on or before 15th June is less than 12% of Assessed Tax
  2. Advance Tax is paid on or before 15th September is less than 36% of Assessed Tax
  3. Advance Tax is paid on or before 15th December is less than 75% of Assessed Tax
  4. Advance Tax is paid on or before 15th March is less than 100% of Assessed Tax

Here’s how you calculate the interest for late payment of advance tax:

The interest on late payment is calculated at 1% simple interest on the tax amount due, calculated from individual cut off dates shown above, until the date of actual payment of outstanding taxes.

Calculation of Interest under section 234C: (in case of a tax payer other than opting for presumptive income u/s 44AD).

Here’s how you calculate the interest: 

Period of  Amount on which

Rate of Interest

Period of Interest

 Amount on which interest is calculated

If Advance Tax paid on or before June 15 is less than 15% of the Amount*       

Simple interest @1% per month

3 months

15% of Amount* less tax already deposited before June 15

If Advance Tax paid on or before September 15 is less than 45% of the Amount*

 Simple interest @1% per month

3 months

45% of Amount* less tax already deposited before September 15

If Advance Tax paid on or before December 15 is less than 75% of the Amount*

 Simple interest @1% per month

3 months

75% of Amount* less tax already deposited before December 15

If Advance Tax paid on or before March 15 is less than 100% of the Amount*         

Simple interest @1% per month

3 months

100% of Amount* less tax already deposited before March 15

*Amount = Tax on total income less TDS less relief u/s 90 or 91 less tax credit u/s 115JD

Let’s say your total tax liability for this financial year is Rs. 100,000 it needs to be paid in installments.

Here’s how:

Payment Dates

 

Advance Tax payable

Total Advance Tax paid

Shortfall (Cumulative)   

Penalties (Cumulative)

 

15th June           

15,000

5,000 

10,000

@1% * 3*10,000 = 300

 

 

15th September               

 

45,000

25,000

20,000

@1% * 3 *20,000=600

 

15th December

 

75,000

35,000

40,000

@1% * 3 *40,000=1200

 

 

15th March        

 

100,000

50,000

50,000

1% * 1 *50,000=500

So the total interest that you need to pay is Rs. 2600.

To sum up

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