written by | May 9, 2022

Interest Imposed by the Income Tax Department: Section 234B

All law-abiding citizens pay taxes. These taxes vary from advance tax and TDS to self-assessment tax, among others. When you default on paying advance tax, you become liable for interest payment under section 234B. The details of the interest are furnished under this section. Taxpayers have to pay their taxes before the financial year ends. As is known, the 31st of July is the last date of the assessment year.

Taxpayers are expected to pay their taxes on or before this date. Individuals who file their returns after this date are penalised. The penalty is 1% simple interest on the amount that is outstanding. This interest is calculated from the date on which the returns were filed until the day of payment. All those who are eligible for payment of advance tax have to do so in accordance with the dates specified by the department of income tax. Failure to do so will be the imposition of a penalty.

Did you know?

Section 234B of the income tax does not penalise senior citizens unless their tax liabilities exceed ₹ 10,000 per month.

Also Read: Interest Imposed by the Income Tax Department Under Section 234C

Interest Under Section 234B

The interest imposed under section 234B of the income tax act is 1% per month and is calculated based on the outstanding amount of advance tax. The penalty applies to all individuals who earn a salary and are self-employed and business owners. The simple interest of 1% is applicable under the following conditions:

  • In the case of any discrepancy towards payment of advance tax, the concerned individuals fail to make the payment of advance tax.
  • Individuals who have paid advance tax but the amount they have paid is less than 90% of the tax amount they are supposed to settle.

What is Advance Tax?

One of the most self-explanatory terms in taxes is that of advance tax. In simple words, when the said income tax is paid in instalments much before the annual date of tax payments. The income tax department has enabled the payment of advance tax every quarter of a year, and the income tax department decides on the dates for making advance tax payments. This type of payment enables the government to collect the taxes consistently, even if it means collecting them every quarter. It also offers relief to the taxpayers who can pay their taxes in small amounts instead of bearing the brunt of one large sum at the end of the financial year. 

The dates of instalment payments for advance tax are as follows:

Date by which payment has to be made

Amount of tax which has to be paid

15th of June

15% of the total tax which has to be paid

15th of September

45% of the total tax which has to be paid

15th of December

75% of the total tax which has to be paid

15th of March

100% of the total tax which has to be paid

Also Read: Everything You Need to Know About Self Assessment Tax

Who Needs to Pay Advance Tax?

Given below are the categories of individuals who need to pay advance tax.

  • Individuals drawing salaries
  • Individuals who are self-employed
  • Business owners
  • Freelancers

In the case of individuals who draw a monthly salary (i.e., they are on the payroll of an organisation), a TDS is deducted by their respective employers. In such cases, if the individuals have an additional source of income, e.g., dividend from shares, interest on income, capital gain, or rent from a residential property, they become liable to pay advance tax. This applies to non-residential Indians as well. Most NRIs are known to save a part of their earnings drawn abroad in Indian banks. If the tax amount to be paid exceeds ₹ 10,000, they too become liable to pay advance tax.

The above categories of individuals who need to pay more than ₹ 10,000 in one financial year are liable to pay advance tax. All the details are listed under section 234B of India's 1961 income tax act.

How is Advance Tax Computed?

At the start, you need to calculate the total amount of income you earn from various sources. This includes

  • Your regular take-home salary every month 
  • Total earnings if you have your own business
  • Capital gains from varied sources
  • Rent made from residential property (in the case of individuals who own more than one house)
  • Interest earned via dividends paid on shares and mutual funds
  • Income earned from a part-time job over the weekends
  • Additional income earned by business owners who offer consultancy

Given below are the steps to compute the amount of advance tax:

  • Calculate all the various incomes you earn in a month
  • From the total gross income or GTI, you can claim deductions under the various sections like 80C, 80D, 80E, 80EE, and 80G. These will vary from case to case, and you can find all the provisions under chapter 6 of the Income Tax Act 1961.  
  • Once you claim deductions, you will obtain the details of which tax slab becomes applicable to you to understand the total dues you have to settle. Deduct the amount of TDS from the tax dues.
  • After making the above calculation, the amount you obtain is the advance tax that you have to pay.

Section 234B Interest Calculation

The amount of interest under section 234B is always calculated at the rate of 1% of the income amount assessed for taxation. This is calculated from the date on which you were supposed to make the payment till the day on which you settled the payment. The computation of interest under sections 234B and 234C varies.

Examples:

Example 1:

Let us take the example of Mr Chandrakant.

  • The total amount of taxes he will pay for the current fiscal year = ₹2,00,000.
  • From his income, the tax deducted at source (TDA) = ₹ 1, 80, 000
  • Part payment made by Mr Chandrakant on March 25 = ₹ 6,000
  • Mr Chandrakant made payment of the remaining amount on July 20 = ₹ 14,000

Interest liability under section 234B:

Tax amount assessed = Total amount of tax – tax deducted at source

₹ 2,00,000 - ₹ 1, 80, 000 = ₹ 20,000

90% of ₹ 20,000 = ₹ 18,000

As per law, Mr Chandrakant should have paid the amount of ₹ 18,000 on the 31st of March, and he made only payment of ₹ 6,000. This makes him liable to pay the penalty in the form of interest on the tax amount that has been assessed, as shown in the above example.

Under the provisions of section 234B, all the said amounts of penalties are rounded off to ensure ease of calculation.

How is the interest calculated on this?

Interest calculation:

  • ₹ 18,000 x simple interest of 1% x a quarter of 4 months (this is calculated till the month of July)
  • ₹ 18,000 x 1% x 4 months = ₹ 720
  • Mr Chandrakant has to pay an interest liability of ₹ 700 as per the provisions of section 234B.

Example 2.

Let us take the example of Ms Aditi.

  • The total amount of tax Ms Aditi has to pay for a said financial year = ₹ 50,000
  • Amount paid as part advance tax by Aditi before 31st of March = ₹ 40,000
  • Amount paid by Aditi on the 30th of May = ₹ 10,000

The initial amount of advance tax paid by Aditi is equal to 90% of the tax liability.

  • 90% of ₹ 50,000 = ₹ 45,000
  • Payment of advance tax made by Aditi = ₹ 40,000

Aditi becomes liable to pay interest liability under section 234B.

Conclusion

This article gives you an insight into the provisions of section 234B of the Income Tax Act. It clearly explains what advance tax is and how it can be made in quarterly instalments for a specific assessment year. This eases the taxpayers' burden, who otherwise have to make a tax payment of the entire amount before the date of filing returns. The contents of this article also clearly state the interest liability imposed in case of failure of payment of advance tax. You may pay a bulk of the advance payment, but if that is not 90% of the total tax amount that has been assessed, you are liable to pay a 1% interest.
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FAQs

Q: What is the meaning of section 234B interest calculation?

Ans:

The interest calculated under section 234B of the Income Tax Act is 1% simple interest, and the default amount is rounded off for ease of calculation purposes.

Q: If an individual makes a part payment towards advance tax settlement, does the person still become liable to an interest penalty under section 234B of income tax?

Ans:

Even if an individual has made a partial settlement towards advance tax payments, but that amount is less than 90% of the total tax amount, the person becomes liable for an interest penalty.

Q: What is the interest rate under section 234B of the Income Tax Act?

Ans:

Section 234B of the Income Tax Act 1961 clearly states that the rate of interest towards the default of advance payment is 1% per month.

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