Section 234B of Income Tax Act: Interest on Delayed Payment of Advance Tax
Section 234B of the Income Tax Act addresses the levy of interest for delay in the payment of advance tax. This section targets those taxpayers who miss or pay less than 90% of their income tax in advance, thereby imposing penal consequences in the form of an interest. Understanding Section 234B is therefore very important for every taxpayer to avoid unexpected charges.
This article aims to simplify Section 234B by providing insights into its significance, application of the said section, and impact on tax planning and payments.
Table of Content
Section 234B of Income Tax Act
Section 234B of Income Tax Act deals with the interest charged for late payment of advance tax. Advance Tax is a practice of paying the income tax in installments based on estimated earnings rather than making a single lump sum payment. When taxpayers fail to pay the advance tax or pay less than 90% of the assessed tax, interest under Section 234B is attracted.
What is Assessed Tax?
The assessed tax refers to the tax liability determined by the Income Tax Department based on the declared total income of the taxpayer and deductions claimed. It is the final amount of tax payable by the taxpayer after deducting TDS, advance tax, and any other tax credits.
Key Points on Section 234B of Income Tax Act
Following are the key points to be considered for Section 234B of Income Tax Act:
Applicability: Section 234B levies interest when the tax paid is less than 90%.
Interest Rate: The interest for delayed payment of advance tax is 1% per month or part of the month on the unpaid balance.
Period of Calculation: Interest under Section 234B is determined from the first day of April following the financial year till the actual date of payment.
What is an Advance Tax?
An Advance tax is often referred to as ‘pay-as-you-earn’ taxation, is the income tax that must be paid in installments during the financial year. This is in opposition to paying a lump sum payment of tax at the end of the financial year. The system of advance tax is based on the principle of earning and paying to facilitate a regular flow of income to the government in the form of taxes.
Who Needs to Pay an Advance Tax?
Advance tax is applicable to all types of taxpayers like: salaried individuals, freelancers, and businesses, whose tax liability for the year is INR 10,000 or more. Particularly, advance tax is payable by those assessee’s who have multiple sources of income apart from salary like: interest income, capital gains, rental income, or business income. Salaried individuals need not have to pay any advance tax as their taxes might have been deducted at source (TDS) by their employers.
Interest under Section 234B of Income Tax Act
The interest under Section 234B is levied on a taxpayer in case of a failure to pay advance tax or has paid less than the 90% of assessed tax as advance tax. The interest is levied at the rate of 1% per month or part of the month on the unpaid amount of the assessed tax. The interest is computed from the first day after the end of the financial year, that is, from 1st April till the date of actual payment.
How to Avoid Interest under Section 234B of Income Tax Act?
The taxpayers should pay attention to the advance tax payment deadlines and estimate the annual income accurately to avoid the interest under Section 234B of the Income Tax Act. Taxpayers can take help from professionals, or may use Advance Tax Calculator available online like that of a TaxBuddy. This may assist in providing a clear picture of the tax amount and prevent unforeseen interest charges.
How to Compute Interest on Advance Tax Default? An Example
An example for computing the interest in case of a default in the payment of advance tax is as below:
Advance tax due: INR 1,00,000
Advance tax paid: INR 0
Shortfall (90% of Assessed Tax): 90% of INR 1,00,000
Interest under Section 234B: Since no advance tax was paid and the amount paid is also less than 90% of the assessed tax, interest will be levied under Section 234B.
Calculation of Interest:
Rate of interest: 1% per month
Period of interest calculation: Assuming the actual payment of tax is on 31st July, the interest will be computed for 4 months starting from 1st April (April to July).
Interest: 1% of INR 1,00,000 (Assessed Tax) * 4 months = INR 4,000
Hence, an additional interest of INR 4,000 under Section 234B would be paid for defaulting on the payment of advance tax.
Most Asked Questions
Q1. Explain Section 234B of Income Tax Act.
Section 234B of the Income Tax Act specifies the interest for the delay in the payment of advance tax. It is applicable when the taxpayer has not paid advance tax or has paid less than the 90% of the assessed tax.
Q2. How is the interest under Section 234B of Income Tax Act calculated?
Interest under Section 234B is computed at the rate of 1% per month or part of the month on the unpaid amount of tax. This period of interest is determined starting from the 1st of April of the assessment year until the payment of actual tax.
Q3. Is there any minimum amount exempted from the calculation of interest under Section 234B?
No. There is no minimum amount of exemption. If the advance tax paid is less than the 90% of the assessed tax, interest will be levied under Section 234B on the shortfall of tax.
Q4. Is waiver possible of interest under Section 234B?
The interest under Section 234B cannot be waived as it is levied mandatorily. However, in exceptional cases, the Income Tax Department may consider waiving off the interest under Section 234B.
Q5. Does interest under Section 234B of the Income Tax Act apply to a Non-Resident?
Yes. Non-Residents are also liable to a Non-Resident as well if there is a non-compliance with the advance tax provisions related to income taxable in India.
Q6. How to avoid interest under Section 234B?
The payment of advance tax should be made within the due date and at least 90% of the assessed tax should be paid as an advance tax before the end of the financial year.
Q7. What if the notice under Section 234B is received even after the payment of advance tax?
The assessee should contact the Income Tax Department with the proof of payment to rectify the issue. The notice might have been issued due to the mismatch or error in the records.
Q8. What are the exceptions of paying interest under Section 234B?
Senior citizens, that is, individuals who are 60 years of age or older, who do not have income from business and profession, are exempt from the payment of advance tax. Consequently, no interest will be levied under Section 234B.
Q9. Can the interest paid under Section 234B be refunded?
No. The interest paid under Section 234B is not refundable since it is in the form of penalty for failure to comply with the advance tax provisions.
Q10. Is there any difference between Section 234A and Section 234B?
Yes. Section 234A is applicable in case of a default in the filing of an Income Tax Return. Whereas, Section 234B is applicable in case of a default in the payment of advance tax.
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