Section 234B of Income Tax Act is levied upon taxpayers for default in payment of Advance Tax.
Advance Tax is the income tax payable if your tax liability exceeds Rs 10,000 in a Financial Year. Advance Tax should be paid in the year in which the income is received. Hence, it is also known as the 'pay-as-you-earn' scheme.
There are two cases in which interest u/s 234B is levied upon taxpayer:
- When a taxpayer is liable to pay Advance Tax but he fails to do so, or
- When a taxpayer has paid Advance Tax but the amount paid is less than 90% of the Assessed Tax.
Advance Tax is NOT applicable if:
- If the taxpayer opts for the presumptive scheme of calculating business income under section 44AD @ 8% of turnover, such taxpayer shall be exempted from payment of advance tax for such business.
- A resident senior citizen (60 yrs or more) who does not have any income from business & profession, is not liable to pay Advance Tax.
Calculation of Interest u/s 234B
The following key points should be kept in mind while doing calculations:
- Interest is charged @ 1%
- The nature of interest is simple interest
- Interest is calculated @ 1% on Assessed Tax (Tax determined u/s 143(1)/ 147/153A) less Advance Tax paid
- Any fraction of month shall be considered as a full month for calculating interest
- When calculating interest, the amount of taxes due shall be rounded off to the multiple of 100 and ignore any fraction of 100
Suppose Mr. Pratik has Assessed Tax liability of Rs. 72,000. Pratik paid all his installments on time but by the end of Financial Year, he had paid Rs. 60,000 as Advance Tax.
The shortfall of taxes in his case can be found after deducting Advance Tax paid from Assessed tax (Rs. 72,000 – Rs. 60,000) which is Rs. 12,000.
He paid the taxes due, i.e. Rs. 12,000 on 4th July when he filed his return.
As per the rules mentioned above, interest @ 1% will be calculated on the taxes due for a period of 4 months, i.e. April, May, June and July (tax was paid on 4th July so it will also be considered as full month).
(Rs. 12,000 x 1%) x 4 = Rs. 480
So, Pratik needs to pay interest of Rs. 480 along with taxes due.
Note: Generally, interest u/s 234C is also charged along with interest under section 234B because shortfall in taxes paid in instalments results in taxes being due at the end of Financial Year.
To know about interest charged u/s 234C, read this guide.