Interest for default in payment of instalment

Interest for default in payment of instalment In this blog, we will see the provision of section 234C which deals with Interest for default in payment of instalment(s).

Under the Income-tax Act, different types of interests are levied for various kinds of delays/defaults.

This is a 3-part series where you will learn about these following things:

Interest for default in payment of instalment(s) of advance tax [Section 234C]

Section 234C provides for levy of interest for default in payment of instalment(s) of advance tax.

As per section 208, every person whose estimated tax liability for the year exceeds Rs. 10,000, shall pay his tax in advance in the form of “advance tax” by following dates :

status by 15th June by 15th September  by 15th march  by 15th December
Taxpayers (other than those who opted for presumptive taxation scheme of section 44AD or section 44ADA) Upto 15% of Advance Tax Upto 45% Advance Tax Upto 75% Advance Tax Upto 100% Advance Tax
Taxpayers who opted for presumptive taxation scheme of section 44AD or section 44ADA) NIL NIL NIL Upto 100% Advance Tax

Note:

Any tax paid till 31st March will be as advance tax.

Interest under section 234C is levied, if advance tax paid in any instalment(s) is less than the required amount. In other words, interest under section 234C in case of deferment of different instalments of advance tax is levied in following cases:

A. In case of taxpayers (other than those who opted for presumptive taxation scheme under section 44AD or section 44ADA), interest shall be levied-

  1. If advance tax paid on or before 15th June is less than 12% of advance tax payable
  2. Also, If the advance tax paid on or before 15th September is less than 36% of advance tax payable
  3. If advance tax paid on or before 15th December is less than 75% of advance tax payable
  4. The advance tax paid on or before 15th March is less than 100% of advance tax payable

B. In case of taxpayers who opted for presumptive taxation scheme of Section 44AD or section 44ADA interest shall be levied if advance tax paid on or before 15th March is less than 100% of advance tax payable.

Interest under section 234C is not levied, if, the shortfall in payment of advance tax is due to failure to estimate the amount of capital gains or income referred to in section 2(24)(ix) (i.e. winning from lotteries, crossword puzzle, etc.) or income from a new business or income referred to in section 115BBDA (i.e., dividend received from a domestic company exceeds Rs. 10,00,000) and the taxpayer pays the required advance tax on such income as a part of immediate following instalments or till 31st March, if no instalment is pending.

Rate of interest

Interest under section 234C for default in payment of instalment(s) of advance tax is charged at 1% per month. In other words, the taxpayer is liable to pay simple interest @ 1% per month for short payment/ non-payment of individual instalment(s) of advance tax.

Period of levy of interest

Interest under section 234C is levied for a period of 3 months, in case of shortfall in payment of 1st, 2nd and 3rd instalment and for 1 month, in case of shortfall in payment of last instalment.

Amount liable for interest

Interest under section 234C is levied on the short paid amount of instalment(s) of advance tax.

Illustration

Mr. Khushal is running a garments shop. Tax Liability of Mr. Khushal is Rs 45,500. He has paid the advance tax as given below:

  • Rs.8,000 on 15th June,
  • Rs.11,000 on 15th September,
  • Rs.12,000 on 15th December,
  • Rs.14,500 on 15th March.

Mr. Khushal has not opted for presumptive taxation scheme of section 44AD. Will he be liable to pay interest under section 234C, if yes, then how much?

Considering the advance tax due dates, the advance tax liability of Mr. Khushal at different installments will be as follows:

  1. In the first installment: Not less than 15% of tax payable should be paid by 15th June. The tax liability is Rs. 45,500 and 15% of 45,500 amounts to Rs. 6,825. Hence, he should pay Rs. 6,825 by 15th June. He has paid Rs. 8,000, hence, there is no short payment in case of the first installment.
  2. In the second installment: Not less than 45% of tax payable should be paid by 15th September. Tax liability is Rs. 45,500 and 45% of 45,500 amounts to Rs. 20,475. Hence, he should pay Rs. 20,475 by 15th September. He has paid Rs. 8,000 on 15th June and Rs. 11,000 on 15th September i.e. total of Rs. 19,000 is paid till 15th September. Hence, there is short payment of Rs. 1,475 i.e. Rs. 20,475 – Rs 19,000.
    Though there is short payment of Rs. 1,475 but Mr. Khushal will not be liable to pay interest under section 234C because he has paid the minimum of 36% of advance tax payable on 15th September. He has paid Rs. 19,000 till 15th September and 36% of 45,500 amounts to Rs. 16,380. Hence, no interest shall be levied in case of deferment of the second installment.
  3. In the third installment: Not less than 75% of tax payable should be paid by 15th December. Tax liability is Rs. 45,500 and 75% of 45,500 amounts to Rs. 34,125. Hence, he should pay Rs. 34,125 by 15th December. He has paid Rs. 8,000 on 15th June, Rs. 11,000 on 15th September and Rs. 12,000 on 15th December i.e. total of Rs. 31,000 is paid till 15th December. There is a short payment of Rs. 3,125 i.e. Rs. 34,125 – Rs 31,000. Hence, he will be liable to pay interest under section 234C on account of a shortfall of Rs. 3,125 (*).
    (*) Due to the shortfall, interest under section 234C will be levied. Interest will be levied at 1% per month on the short paid amount of Rs. 3,100 (i.e. Rs. 3,125 rounded off to Rs. 3,100 as per Rule 119A). Interest will be levied for a period of 3 months. In other words, interest will be levied on Rs. 3,100 at 1% per month for 3 months. Interest under section 234C will come to Rs. 93.
  4. In last installment: 100% of tax payable should be paid by 15th March. The total tax liability of Rs. 45,500 is paid by Mr. Khushal by 15th March i.e. 8,000 on 15th June, Rs. 11,000 on 15th September, Rs. 12,000 on 15th December and Rs 14,500 on 15th March. Hence, there is no short payment in case of the last installment. Thus, Mr. Khushal will not be liable to pay interest under section 234C in case of the last instalment.

This comes to the end of our post. If you have any queries or doubts kindly drop them in the comment section below.

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