Interest for default in the payment of advance tax

In this blog, we will see the provision of section 234B which deals with the Interest for default in the payment of advance tax.

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

Interest for default in the payment of advance tax [Section 234B]

Under Section 234B, interest is levied for default in the payment of advance tax. This interest is levied in two cases;

  • When the taxpayer has failed to pay advance tax though he is liable to pay advance tax; or
  • Where the advance tax paid by the taxpayer is less than 90% of the assessed tax (meaning of assessed tax is discussed later)

As per Section 208 of the Act, the advance tax shall be payable by the taxpayer during the financial year if estimated tax liability of assessee during that year is ten thousand rupees or more.

Rate of interest

Under section 234B, interest for default in the payment of advance tax is levied at 1% per month or part of a month. In other words, the taxpayer is liable to pay simple interest at 1% per month for default in the payment of advance tax.

Amount liable for interest

Interest under section 234B is levied on the amount of unpaid advance tax. If there is a shortfall in payment of advance tax, then interest is levied on the amount by which advance tax is short paid. The amount of unpaid/short paid advance tax is computed as follows:

particulars Amount
Assessed Tax * XXXX
Less: Advance Tax Paid XXXX
Amount of unpaid / short paid advance tax XXXX

* Assessed tax means the amount of tax reduced by advance tax, tax deducted/collected at source. Also, relief claimed under various sections like sections 90/90A/91 and tax credit claimed under section 115JAA/115JD.

Period of levy of interest

Interest under section 234B is levied from the first day of the assessment year, i.e., from 1st April till the date of determination of income.

In a case where the income is increased on account of assessment/re-computation, interest under section 234B will be levied on the differential amount from the first day of the assessment year till the date of assessment/re-computation.

In a case where an application is made to Settlement Commission, interest under section 234B will be levied on the differential amount from the first day of the assessment year till the date of making the application.

Further, if the income as declared in the application is increased by the Settlement Commission, interest under section 234B will be levied on the differential amount from the first day of the assessment year till the date of such order.

If as a result of rectification order of the Settlement Commission, income is increased/decreased, interest will also be increased/decreased accordingly. If the taxpayer has paid any tax before completion of the assessment, then interest will be levied as follows:

  • Upto the date of payment of self-assessment tax, interest will be computed on the amount of unpaid advance tax.
  • From the date of payment of self-assessment tax, interest will be levied on the unpaid amount of advance tax after deducting the self-assessment tax paid by the taxpayer.

Illustration 1

Mr. Mangal is running a provision shop. The tax liability of Mr. Mangal for the year is Rs. 48,400. He has paid the advance tax of Rs. 46,000 till 31st March. Balance tax of Rs. 2,400 is paid by him at the time of filing the return of income. Will he be liable to pay interest under section 234B?

In this case, Mr. Mangal has paid 95% of the advance tax (*) i.e. more than 90% and thus, no interest will be levied under section 234B.

(*) The tax liability of Mr. Mangal is Rs. 48,400 and he has paid the advance tax of Rs. 46,000. The quantum of advance tax paid by him will come to 95% (i.e., Rs. 46,000/Rs. 48,400) of the total tax liability.

Illustration 2

Mr. Raja is engaged in the furniture business. The tax liability of Mr. Raja for the year is Rs. 58,400. He has paid the advance tax of Rs. 35,000 till 31st March. Balance tax of Rs. 23,400 is paid by him at the time of filing the return of income. Will he be liable to pay interest under section 234B?

In this case, Mr. Raja has paid the advance tax of Rs. 35,000. The quantum of advance tax paid by him is 60% of the total tax liability (*) i.e. less than 90% and hence, he will be liable to pay interest under section 234B.

(*) The tax liability of Mr. Raja is Rs. 58,400 and he has paid the advance tax of Rs. 35,000. The quantum of advance tax paid by him will come to 60% (i.e., Rs. 35,000/Rs. 58,400) of the total tax liability.

Illustration 3

Mr. Suraj is a businessman. His tax liability is Rs. 28,400. He has not paid any advance tax but there is a TDS credit of Rs. 10,000 in his account. He has paid the balance tax on 31st July i.e. at the time of filing the return of income. Will he be liable to pay interest under section 234B, if yes, then how much?

In this case, the tax liability (after allowing credit of TDS) of Mr. Suraj comes to Rs. 18,400 (i.e. Rs. 28,400 – Rs. 10,000) which exceeds Rs. 10,000 and hence, he will be liable to pay advance tax.

He has not paid any advance tax and hence, he will be liable to pay interest under section 234B. Interest under section 234B will be levied at 1% per month or part of the month. In this case, Mr. Suraj has paid the outstanding tax on 31st July and hence, interest under section 234B will be levied for the period from 1st April to 31st July i.e. for 4 months. Interest will be levied on the unpaid tax liability of Rs. 18,400. Interest at 1% per month on Rs. 18,400 for 4 months will come to Rs. 736.

Share On:

Leave a Reply

Your email address will not be published. Required fields are marked *