Each citizen of India is accountable for filing tax returns and paying the taxes due. It's a good habit to have. Your taxes provide the government with a significant source of cash, which it invests in critical public programs and services. As we all know, Taxpayers must file an income tax return within a certain amount of time. Interest is levied for late submission of an income tax return under section 234A of the Income Tax Act 1961.
Even if you file your income tax return after the deadline, you may be subject to one of the following scenarios:
- You owe the income tax department an amount you haven't paid yet.
- You are entitled to a refund.
- There are no outstanding taxes to pay and no refunds owed to you from the IRS.
The amount of interest due as a result of the delay is determined by the circumstances described above.
Did you know?
Although return filing dates for AY 2021-22 were extended on account of covid 19, according to circular No. 9 of 2021, dated May 20, 2021, if an assessee owes more than ₹1,00,000 in tax, they are not eligible for section 234A due to date extension. Interest will be charged from August 1, 2021 (non-audit cases) or December 1, 2021 (audit cases), whichever comes first.
What is Section 234A?
Under the Income Tax Act 1961, section 234A has provisions for interest in the event of a failure to file tax returns. Individual taxpayers must generally file their tax returns by July 31 of each assessment year. If you fail to file your return on time, interest will be charged under section 234A of the Income Tax Act. Your tax liability determines the amount of interest you pay. And broadly speaking, there may be three possible scenarios for the failure of the filing of return which is:
- You need to pay taxes to the IT department, and you have not paid them on time.
- You need to receive a refund from the IT department.
- You have paid your taxes to the IT department, and there are no outstanding dues or refunds.
In the first point, interest under section 234A will be charged, while in the other two scenarios, the assessing officer may choose to levy the interest if they deem it appropriate. On delayed payment of taxes, there are three types of interest prescribed under the IT Act under section 234 of the Income Tax Act, namely under clauses A, B, and C.
Also Read: Everything You Need to Know About Self Assessment Tax
Section 234A – Interest for Default in Filing Tax Return
For failure to file a tax return on time, interest is charged under section 234A. If the assessee files their ITR beyond the due date, they are liable for interest.
Interest Rate
For failure to file a tax return on time, interest is charged under section 234A. Interest is charged at 1% per month or a fraction of a month. Simple interest is the nature of interest. In other words, the taxpayer is obliged to pay simple interest of 1% every month or portion of a month if the return of income is not filed on time.
Formula
Interest for late filing of your income tax return is calculated using the following formula:
Interest under section 234A = (Net tax outstanding) x (Period in months) x (1% per month)
Net tax outstanding is the net tax liability after adjustments at the end of the fiscal year. The number of months between the due date and the actual date of filing returns is expressed in months.
Under section 234A, interest is assessed at the rate of 1% per month.
Interest Period
Section 234A interest accrues from the day after the due date for filing the income tax return until the date the income tax return is furnished.
Amount on which interest is levied – Interest is calculated on the amount of tax payable after reducing tax deducted at sources, advance tax paid already.
The amount on which interest is calculated is determined under section 143 or on income as determined under regular assessment. Still, the amount is to be reduced by taxes already paid in advance tax, TCS, TDS, and reliefs, if any.
Examples of Section 234A
Example 1
Let's say Mr X's total tax liability for FY 19-20 is ₹1 lakh (net of advance tax paid and TDS if applicable), and he files his return on March 31, 2021, rather than August 31, 2010, the due date for filing your income tax return for FY 2019-20.
Now Mr X's tax payments are seven months late.
₹1 lakh x 1% x 7 = ₹7,000 in interest
This ₹7,000 is in addition to the tax he will have to pay in any event. If he does not file his return, he will be charged 1% interest until the end of the assessment year, which is March 31.
Also Read: Penalty for Late Filing of Income Tax Return
Example 2
Mr Singh owes a total of ₹10,00,000 in unpaid taxes (including net of the advance tax paid and TDS, if any). Instead of filing his tax return on July 31 of the assessment year, he does so on December 15. He is 5 months late in paying tax since he missed the deadline to file a return.
The interest rate is:
₹10,00,000 X 1%X 5 = ₹50000.
Mr Singh will pay an additional ₹50,000 in addition to the tax amount. If he fails to file his tax return, he will be obliged to pay 1% simple interest until March 31, the end of the assessment year.
Example 3
Mr Rakesh is the owner and operator of a medical supplies business. The date for filing his tax return in his situation is July 31. He submitted his tax return on December 3. Mr Kumar owes ₹38,400 in taxes ( paid on December 3). He paid ₹5,000 in advance tax and received a TDS credit of ₹15,000. Will he be required to pay interest under section 234A, and how much?
Mr Rakesh, having filed his income tax return after the deadline, on July 31, will be subject to interest under section 234A as a result. The interest rate will be 1% each month or a fraction of a month. The return of income is due on July 31, but it is filed on December 3, leading to a 4 month and 3-day delay. Because a fraction of the month, specifically three days, will be considered a complete month, interest will be levied for 5 months. The interest of 1% each month for 5 months would be imposed on ₹18,400.
As a result, section 234A interest will be ₹920.
After deducting the advance tax of ₹5,000 and TDS of ₹15,000 from the tax liability of ₹38,400, the net liability will be ₹18,400. As a result, interest in the amount of ₹18,400 would be charged.
Conclusion
Section 234A will punish the individual for failing to file the return on time. So, if you file your return late, be prepared to pay extra in the form of penal interest. The penalty for late filing is 1% every month for the months you didn't file your tax return. You must file the return by July 31 of the fiscal year, for which you must pay income tax.
We hope that this article has explained the provisions of section 234A of the Income Tax Act to you with examples.
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