Interest on non-payment of advance tax under section 234B of Income Tax Act

Section 234B of the Income Tax Act contains interest provisions, which are discussed in this article. Section 234B, in particular, applies when a taxpayer fails to pay advance tax.

Section 208 requires the taxpayer to pay advance tax if the amount of tax payable or estimated tax payable for the financial year is Rs.10,000 or more. In the event that the taxpayer fails to pay the advance tax or pays less advance tax. Then, pursuant to Section 234B, interest would be due.

Interest will be applicable/ payable only in the following two cases, according to section 234B:

1. The taxpayer is required to pay advance tax. However, he does not, pay the same; or

2. The advance tax has been paid by the taxpayer and such amount is less than 90% of the assessed tax liability

Now the question arises, What is Assessed Tax?

The meaning of the term "assessed tax" is covered in Explanation 1 to Section 234B as under:

When the tax is calculated in accordance with Section 143 (1):

The assessed tax is a tax on total income calculated in accordance with Section 143(1).

When the tax is calculated by regular assessment:

The assessed tax is Tax on total income less TDS/ TCS less tax relief granted under section 89/ 90/ 90A/ 91 less tax credit permitted under section 115JAA or section 115JD.

The interest rate under section 234B:

Under Section 234B interest is computed at 1% on Assessed Tax minus Advance Tax/TDS. A part of a month is considered as a complete month. The amount on which interest is levied is rounded off such that any fraction of a hundred is omitted.

For a better understanding of the provisions of section 234B, consider the following

examples:

ILLUSTRATION 1:

1. When no advance tax is paid -

The tax liability of Mr. Akash is assessed at Rs.38,000 in FY 2020-21. He hasn't made any tax payments in advance. He does, however, have Rs.5,000 TDS credit. On 30th June 2021 while filing Income Tax Return, he pays the whole Rs.33,000 tax due i.e. Rs.38,000 - Rs.5,000. In this case, since, net tax liability after TDS credit is more than Rs.10,000. Mr. Akash was liable to pay advance tax during Financial Year 2020-21 itself. Since Mr. Akash has not paid any advance tax interest under section 234 B will be payable as under:

Assessed Tax : Rs.33,000 (i.e. Rs.38,000 - Rs.5,000)

Rate of Interest : 1% (Simple Interest)

Thus interest payable would be Rs.990/- i.e. Rs.33,000 x 1% x 3 months (i.e. April to June)

2. When advance tax is paid less than 90% of the assessed tax -

Continuing with the previous example, suppose Mr. Akash has paid Rs.10,000 in advance tax. However, the advance tax paid is less than 90% [i.e., INR 29,700 (INR 33,000 * 90%)]. As a result, interest under section 234B will be due as follows:

Interest Payable would be Rs.690/- (Rs.33,000 - 10,000) x 1% x 3 Months (i.e. April to June)

ILLUSTRATION 2:

Assume Amit's total tax liability for the fiscal year is Rs. 200,000. TDS of Rs 1,45,738 has already been deducted from his earnings. Amit paid Rs 10,000 on March 25th, and the remaining Rs 42,262 was paid when he filed his return on July 20th. Let us see if Amit is required to pay interest under Section 234B.

Let us begin by calculating the assessed tax. Tax assessed = Rs.2,00,000 (total tax) – Rs.1,45,738 (TDS) = Rs 54,262. Before March 31st, Amit should have paid at least 90% of the assessed tax i.e. Rs 54,262 which comes to Rs 48,836. However, he just paid Rs.10,000. As a result, Amit is required to pay interest under Section 234B as follows:

Rs.54,200 (assessed tax, fraction of 100 ignored) – Rs.10,000(Advance Tax) = Rs.44,200. Rs.44, 200 x 1% x 4 months (April to July) = Rs.1768. Rs.1768 is the interest payable under section 234B by Amit.