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Section 234B – Interest For Defaults In Payment Of Advance Tax

Payment of Advance Tax is mandatory when the tax liability is more than INR 10,000. To ensure that taxpayers pay Advance Tax on time, the Income Tax Department has introduced section 234B to levy interest in case there is a default in the payment of Advance Tax. In this article, we will discuss the provisions of Section 234B in detail.

Applicability Of Section 234B

Interest under section 234B is levied in the following two cases:

  • When the taxpayer has failed to pay Advance Tax though he/she is liable to pay Advance Tax; or
  • Where the Advance Tax paid by the taxpayer is less than 90% of the Assessed Tax.

Here, ‘Assessed Tax’ means  the tax on total income calculated during the regular assessment and further reduced to the extent of:

  • Tax deducted/collected at source,
  • Reliefs/deductions available under various sections like sections 89/90/90A/91 and
  • Tax credit claimed under section 115JAA/115JD.

Rate Of Interest u/s 234B

Under section 234B, interest for default in payment of Advance Tax is levied at 1% (simple interest) per month (or part of a month).

How Is Interest u/s 234B Calculated?

Interest under section 234B is levied on the amount of unpaid/short paid Advance Tax. The amount of unpaid/short paid Advance Tax can be computed as follows:

Particulars Amount (INR)
Assessed tax (A) XXXXX
(Less) Advance Tax paid (if any) (B) (XXXXX)
Amount of unpaid/short paid Advance Tax (A-B) XXXXX

The interest on the unpaid/shot paid Advance Tax is calculated from the first day of the Assessment Year (from 1 April of the relevant AY) till the date of determination of income under section 143(1) or the date on which he regular assessment is made. Generally, the period between the 1st day of the relevant AY and the date of filing income tax return is considered to calculate the interest payable u/s 234B.

Points To Remember

  • If the taxpayer has paid any tax before the completion of the assessment, then interest will be levied as follows:
    • Up to the date of payment of self-assessment tax, interest will be computed on the full amount of unpaid Advance Tax.
    • From the date of payment of self-assessment tax, interest will be levied only on the unpaid amount of Advance Tax after deducting the self-assessment tax already paid.
  • In cases when the income is increased on account of assessment/re-computation, interest under section 234B will be levied on the differential amount from the first day of the relevant assessment year till the date of assessment/re-computation.
  • For calculation of interest u/s 234B, a fraction of a month should be considered as a full month.
  • The amount of tax, penalty or other sums in respect of which interest is to be calculated should be rounded off to the nearest multiple of INR 100.

Illustration

The tax liability of Mr A is INR 28,400 (for FY 2018-19). He has not paid any Advance Tax, but there is a TDS credit of INR 10,000 in his account. He paid the balance tax on 31 July 2019 (at the time of filing the income tax return). Will he be liable to pay interest under section 234B, if yes, then how much?

In this case, the tax liability (after allowing credit of TDS) of Mr A is INR 18,400 (INR 28,400 – INR 10,000). Since the tax liability exceeds INR 10,000, Mr A was liable to pay Advance Tax. However, since he has not paid the Advance Tax, interest u/s 234B will be charged at 1%.

Here, the interest u/s 234B will be INR 736 (18,400*1%*4 months*).

*Period between 1 April 2019 to 31 July 2019.