written by Khatabook | August 17, 2021

Interest Imposed by the Income Tax Department Under Section 234C

The Income Tax department and the Indian government are constantly attempting to make tax payments easier and more efficient for citizens. You can pay Advance Tax in four instalments throughout the year. If you continue to fall behind, you will face a penalty in the form of interest.

Section 234C of Income Tax Act of 1961 covers several provisions that apply if a taxpayer fails to pay advance tax on time. The tax department anticipates timely advance tax payment in four instalments, one for every quarter of the fiscal year. If you don't, the tax department can levy an interest penalty under section 234C.

According to the income tax agency, taxpayers who are liable to pay the tax that exceeds ₹10,000 in a single financial year must pay advance tax. The Internal Revenue Service makes it possible for a citizen to pay their tax bill in four payments. This allows citizens to pay in instalments and avoid having to pay the entire amount in March. However, if a citizen required to pay advance tax, defaults on any instalment, interest on income tax will be charged. The Income Tax Act of 1961, Section 234C, permits for such interest due to postponed payment of advance tax.

Section 234C Interest Payments

On the advance tax payable, interest is applied at 1% of the entire amount owed. It is determined by adding the cut-off dates for each cut-off date until the necessary tax is paid in full.

Interest will only be assessed if the advance tax paid by the individual on or before the 15th of June and 15th of September is less than 12% and 36% of the corresponding net tax dues, respectively. Furthermore, suppose the shortfall in advance tax payment is due to unexpected or overestimated capital gains or speculative income (winning the lottery, for example). In that case, no interest is charged to the taxpayer.

  • On net overdue tax, interest is imposed at 1% per month.
  • The interest is calculated using the simple interest formula.
  • To calculate interest on tax, any portion of a month will be treated as a full month.

Note: If the advance tax paid is less than 90% of the assessed tax when the financial end is finished, an interest penalty is imposed according to section 234B. The charged interest according to section 234B is calculated independently from the interest charged according to section 234C.

Who is responsible for the payment of advance tax?

In the current scenario, taxpayers will be required to pay tax if their income tax burden is greater than ₹ 10,000 for the year. However, after deducting tax deducted at source (TDS) for the financial year, this sum should be greater than ₹ 10,000. 

Every assessee who owes a total tax burden of more than ₹ 10,000 after TCS/TDS is required to pay advance tax. 

Companies, partnership firms, AOPs/BOIs (Association of Person/Body of Individual), salaried employees, self-employed professionals/businesses, taxpayers who choose presumptive tax plans, and so on are all examples of an assessee. 

The deadline for paying advance tax varies depending on whether you are a regular taxpayer or a taxpayer who is subject to the presumptive taxation plan. Nevertheless, a resident senior citizen with no income from business or profession is immune from advance tax. A senior citizen is someone who is above 60 years old.

Section 234C interest levied for failure to pay advance tax

If a taxpayer fails to pay advance tax instalments, interest is levied according to Section 234C of the Income Tax Act of 1961. This occurs when a taxpayer fails to pay or pays less in advance tax than is owed under each instalment. In other words, if separate instalments of the advance tax are deferred, interest is assessed according to section 234C of the Income Tax Act, 1961. This is excluded for taxpayers who opt for a presumptive taxation scheme under section 44AD or section 44ADA.

The following are examples of deferment of various advance tax instalments:

If the advance tax is paid:

Due advance tax

On or before June 15th

Is less than 12% of the advance tax due

On or before September 15th

Is less than 36% of the advance tax due

By the 15th of December

Is less than 75% of the advance tax due

On or before March 15th

Is less than the whole amount of due advance tax

Also Read: Forms, Submission & Applicability under Section 44AB of Income Tax

Taxpayers who choose the section 44AD or 44ADA presumptive taxation system

The deferment rules are different in the case of taxpayers who choose a presumptive taxation scheme. Section 234C applies if the assessee's advance tax payment is less than 100% of the total due advance tax.

Advance tax interest is not charged if the following criteria are met:

  • Advance tax interest is not charged if there is a deficiency in due advance tax payment or there is a failure in estimating the number of capital gains or speculative income.
  • No interest 234C is required from lottery income, gambling income, etc.
  • The taxpayer has paid the full tax due while also paying any residual advance tax payments that were due before the end of the financial year.

Rate of Interest 

Interest is assessed at 1% per month or part of a month according to Section 234C for failure to pay advance tax instalment(s). Simple interest is the nature of interest. In other words, the taxpayer is obliged to pay a simple interest of 1% every month or part of a month for failing to pay individual advance tax instalment(s) on time.

Interest-bearing period

Interest u/s 234C is charged for three months if the first, second, and third instalments are not paid on time and for one month if the last instalment is not paid on time.

The short-paid amount of advance tax instalment(s) is subject to interest as per Section 234C.

Illustration

Mr Raunak owns and operates a clothing store. He owes ₹ 45,500 in taxes. He has paid advance tax in the following amounts:

  • ₹ 8,000 on June 15th,
  • ₹ 11,000 on September 15th, 
  • ₹ 12,000 on December 15th, and 
  • ₹ 14,500 on March 15th

Mr Raunak has not chosen the Section 44AD presumptive taxation system. Will he be required to pay interest according to Section 234C, and if so, how much will he have to pay?

**

Every person whose projected tax due for the year exceeds  ₹10,000 is required to pay their tax in advance by the following dates in the form of "advance tax."

Status

By 15th June

By 15th September

By 15th December

By 15th March

Taxpayers (excluding those who chose the section 44AD or 44ADA presumptive taxation plan)

An advance tax of up to 15% is possible.

An advance tax of up to 45% is possible.

An advance tax of up to 75% is possible.

An advance tax of up to 100% is possible.

Section 44AD or 44ADA taxpayers who chose the presumptive taxation plan

nil

nil

nil

 

An advance tax of up to 100% is possible.

Any tax paid before the 31st of March will be considered an advance tax.

Based on the above dates, Mr Raunak's advance tax liability in various instalments will be as follows:

1) The first instalment: At least 15% of the tax due must be paid before June 15th.

The total tax liability is  ₹ 45,500, and 15% of 45,500 equals ₹ 6,825. As a result, he must pay ₹ 6,825 by June 15th. He has already paid ₹8,000, so there would be no shortfall in the first instalment.

2) Second instalment: By September 15th, he must have paid at least 45% of the tax due. The tax liability is ₹ 45,500, and 45% of 45,500 equals ₹ 20,475. As a result, by September 15th, he must pay ₹ 20,475. He paid ₹ 8,000 on June 15th and ₹ 11,000 on September 15th (for a total of Rs. 19,000). There is an ₹ 1,475 short payment (₹ 20,475 – ₹ 19,000).

Even if there is a short payment of Rs. 1,475 due on the 15th of September; Mr Raunak will not be subject to interest under section 234C because he has paid a minimum of 36% of the advance tax due. He has paid ₹ 19,000 up to the 15th of September, 36% of the total of ₹ 45,500, or ₹ 16,380. As a result, if the second instalment is missed, no interest will be charged.

3) Payment of the third instalment: By the 15th of December, at least 75% of the tax due must be paid by Mr Raunak. The total tax liability is ₹ 45,500, and 75% of that is ₹ 34,125.

As a result, by December 15th, he must pay ₹ 34,125. He paid ₹ 8,000 on June 15th, ₹11,000 on September 15th, and ₹ 12,000 on December 15th (for a total of ₹ 31,000). Short payment of ₹ 3,125 is required (i.e. ₹ 34,125 – ₹ 31,000). As a result, on account of the shortfall of  ₹ 3,125 (*), he will be required to pay interest per section 234C.

4) The final instalment: You must pay 100% of the tax due by March 15th. Mr Raunak pays his entire tax burden of ₹ 45,500 by the 15th of March (i.e. 8,000 on the 15th of June, ₹ 11,000 on the 15th of September, ₹ 12,000 on the 15th of December, and ₹ 14,500 on the 15th of March). As a result, in the case of the final instalment, there will be no payment shortfall. In the instance of the last instalment, Mr Raunak will not be liable to pay interest according to section 234C.

(*)When talking about the third instalment, there is a shortfall of ₹ 3,125 (as computed above). Interest under Section 234C will be charged due to a shortfall in the third instalment. On the short-paid amount of ₹ 3,100, interest would be charged at a rate of 1% each month or part-month (i.e. ₹ 3,125 rounded off to ₹  3,100 as per Rule 119A). For three months, interest will be charged. In other words, for the next three months, interest will be charged on ₹ 3,100 at 1% every month. Section 234C interest will amount to ₹ 93.

How to avoid penalty payments?

  • The only way to prevent such fines is to pay your taxes on time and file your returns. However, planning for the lump-sum tax payment can be difficult at times. Tax defaults and deficits may develop in such circumstances.
  • One approach to get out of these situations is to reduce your tax burden by taking advantage of all available tax deductions. Investing in specified tax-deductible financial instruments, such as life insurance premium where you can get deductions up to 20% of capital sum assured according to Section 80C.
  • Every financial year, you can claim a deduction of up to ₹ 1.5 lakh for premiums paid on your life insurance policy. However, saving money on taxes should not be the sole motivation for purchasing life insurance. It would be best to choose a plan that is compatible with your investment objectives and long-term financial objectives.

Also Read: Claiming Deduction on Interest under Section 80TTA of Income Tax Act

Conclusion 

If you want to save money while also improving your standing with the Income Tax Department, paying your taxes on time is the best option. Due to this, understanding the 234C of Income Tax Act is important for paying interest on time. If you're prone to forgetting dates, prepare a list of them and post it somewhere you'll see it frequently, such as your office or home. Or you can download the Khatabook app today where you can receive such reminders and get more information about tax rules and regulations. In this way, you can avoid interest on late payment of advance tax. This also serves as a reminder to pay your taxes on time to avoid the penalty levied according to Section 234C

Frequently Asked Questions 

1. What are the consequences of paying income tax late or not at all?

In the event of a delay or non-payment of income tax, the taxpayer is subjected to many penalties. Sections 234A, 234B, and 234C of the Income Tax Act are used to determine the interest penalty.

2. What is the formula for calculating the interest penalty according to Section 234A?

Interest penalty = outstanding tax multiplied by 1% multiplied by the number of months (delayed), where a fraction of a month is treated as a full month. For example, if you are four months and ten days late, you will be charged interest for five months.

3. What does it mean to pay tax in advance?

Advance tax refers to income tax paid in advance in the same year as the money is earned. If a person's total taxable income in a financial year exceeds ₹ 10,000, they must pay advance tax.

4. What does an assessed tax refer to?

The tax amount computed according to section 143(1) and the tax on the overall income determined via such regular assessment is referred to as an assessed tax

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