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Interest Imposed Under Section 234C of Income Tax Act

Updated: May 22


Section 234C of the Income Tax Act: Advance Tax and Interest Calculations

Income tax laws in India are designed to ensure the timely collection of taxes to fund various government initiatives. Section 234C of the Income Tax Act plays a crucial role in this regard, particularly concerning advance tax payments. In this blog, we will delve into the intricacies of Section 234C, explore the concept of advance tax, and understand how interest is charged under this section.

 

Table of Content

 

What is 234C of the Income Tax Act?

Section 234C of the Income Tax Act 1961 deals with the charging of interest for default in the payment of advance tax. It aims to ensure that taxpayers pay their taxes in installments throughout the financial year, preventing the last-minute burden on the taxpayer and facilitating a steady inflow of revenue for the government.


What is Advance Tax?

Advance tax is the system of paying income tax in installments instead of a lump sum at the end of the financial year. It is applicable to all taxpayers, including individuals, businesses, and professionals, whose total tax liability for the year exceeds Rs. 10,000. Advance tax payments are made in specified installments during the financial year, with the final installment due before the end of the financial year.


Installments and Due Date  of Advance Tax Payments

The installment dates for advance tax payments in India were as follows:


Table of Installments and Due Date  of Advance Tax Payments

When Does Interest on Advance Tax Not Accrue?

Interest on the shortfall in advance tax payment is not applicable if the deficiency arises due to the underestimation or failure to estimate the amount of capital gains or speculative income (such as lottery or gambling income). 

The taxpayer is exempt from interest if they have fully paid the tax liability associated with the mentioned income types while settling the remaining installments of advance tax or, if no installments are due, by paying them before the conclusion of the financial year.

How is interest charged under Section 234C?

When taxpayers fail to make timely payments for the scheduled advance tax installments set by the Income Tax Department, they become liable to pay interest under Section 234C. This interest is levied based on the prescribed percentages of the assessed tax for each installment period.


The taxpayer is obligated to pay interest in the following scenarios:

  1. If the advance tax paid is less than 12% of the assessed tax before 15th June.

  2. If the advance tax paid is less than 36% of the assessed tax before 15th September.

  3. If the advance tax paid is less than 75% of the assessed tax before 15th December.

  4. If the advance tax paid is less than 100% of the assessed tax before 15th March.


The interest is calculated at a rate of 1% on the shortfall amount from the due advance tax for each installment period.

Applicability and non-applicability of provisions of Section 234C:

Section 234C applies to all taxpayers, but individuals who have chosen a presumptive taxation scheme where these taxpayers fail to make advance tax payments by the 15th of March they are subject to interest under section 234 C. The interest rate for this is 1% for one month of delay.


Exceptions to paying interest under Section 234C include:

A resident senior citizen with no income under the 'PGBP' heading.

If the net tax liability is less than Rs. 10,000, no interest is charged under Section 234C.

Calculation of Interest under Section 234C:

Case 1 - Calculation of Interest when the taxpayer is not opting for presumptive income under Section 44AD:


Table of Interest is calculated by applying the following formula

Example:

Let's assume Mr. A, a non-presumptive taxpayer, has a total tax liability of Rs. 2,00,000. He is required to pay advance tax in four installments. If he pays Rs. 40,000 in the first quarter, Rs. 30,000 in the second quarter, and none in the third quarter, the interest for the third quarter would be calculated as follows:


Interest =1/100 (1,00,000/3 ) 3 = Rs. 1,000 


Case 2 - Calculation of Interest when the taxpayer is opting for presumptive income under Section 44AD:

In this case, the interest is calculated on the basis of the difference between the advance tax paid and 8% of the presumptive income.


Table of Calculation of Interest when the taxpayer is opting for presumptive income under Section 44AD


What is the Difference between Section 234B and Section 234C of the Income Tax Act


Section 234B  and Section 234C of the Income Tax Act address different aspects related to interest payments for taxpayers. Section 234B pertains to the imposition of interest when taxpayers do not pay advance tax or pay an amount less than 90% of the net tax payable within the assessment year. Consequently, interest under Section 234B is applicable from the end of the fiscal year until the actual date of tax payment.


On the other hand, Section 234C deals with the imposition of interest on taxpayers who do not pay their taxes in a timely manner during the fiscal year. This section comes into play when taxpayers fail to make installment payments of advance tax as per the prescribed schedule throughout the fiscal year. The interest under Section 234C is applicable during the fiscal year itself, addressing the timely payment of taxes at various intervals rather than waiting until the end of the assessment year.


Conclusion:

Section 234C of the Income Tax Act is a significant provision that ensures timely payment of taxes through advance tax. Understanding the calculations and scenarios where interest may be charged is essential for taxpayers to comply with the law and avoid penalties. Regular assessment and adherence to advance tax payment schedules will not only prevent interest liabilities but also contribute to a smoother financial planning process.


FAQ

Q1. What is Section 234C of the Income Tax Act? 

Section 234C pertains to the charging of interest for default in the payment of advance tax as per the prescribed installment dates.


Q2. Who is liable to pay advance tax under Section 234C? 

 All taxpayers, including individuals, businesses, and professionals whose total tax liability exceeds Rs. 10,000, are required to pay advance tax.


Q3. When are the installment dates for advance tax payments under Section 234C? 

The installment dates are typically 15th June, 15th September, 15th December, and 15th March.


Q4. What happens if I fail to pay the required amount of advance tax? 

If you fail to pay the specified percentages of advance tax by the installment dates, interest will be charged under Section 234C.


Q5. How is interest calculated under Section 234C? 

Interest is calculated on the shortfall amount of advance tax at a rate of 1% for each installment period.


Q6. Is interest under Section 234C applicable to all taxpayers? 

Section 234C is applicable to all taxpayers except those opting for presumptive income under Section 44AD.


Q7. What is the presumption income under Section 44AD? 

Presumptive income is a simplified method for certain businesses where a specified percentage of turnover is considered as income.


Q8. Are there different interest rates for different installment periods under Section 234C? 

No, the interest rate remains constant at 1% for each installment period.


Q9. Can interest under Section 234C be waived or reduced? 

Generally, the interest is mandatory, but certain circumstances may be considered by the assessing officer on a case-by-case basis.


Q10. What happens if I pay the entire assessed tax before the last installment date? 

 If the entire assessed tax is paid before the last installment date, no interest under Section 234C will be charged.


Q11. Is interest under Section 234C a penalty or a tax? 

It is not a penalty but an interest charged on the delayed or insufficient payment of advance tax.


Q12. Can I revise my advance tax payments if I make an error? 

No, advance tax payments, once made, cannot be revised. It's crucial to accurately estimate and pay taxes in each installment.


Q13. Are there any exceptions to the applicability of Section 234C? 

Yes, taxpayers opting for presumptive income under Section 44AD are exempted from Section 234C provisions.


Q14. Can I appeal against the interest charged under Section 234C? 

Taxpayers can appeal against the interest charged under Section 234C by following the appropriate legal procedures.


Q15. What happens if I don't pay any advance tax throughout the year? 

Failure to pay any advance tax may result in the imposition of interest as per Section 234C.





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