What is Interest penalty under section 234B?
Interest under section 234B of Income Tax Act is levied upon those taxpayers who default in payment of Advance Tax.
There are other similar interest penalties applicable under section 234A (delay in filing tax return) and section 234C (defaulting payment of Advance Tax instalments).
Note: 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. Click here to know more about Advance Tax.
Who Needs to Pay Interest Penalty under Section 234B?
There are two cases in which interest u/s 234B is levied upon taxpayer:
a) When a taxpayer is liable to pay Advance Tax but he fails to do so, or
b) When a taxpayer has paid Advance Tax but the amount paid is less than 90% of the Assessed Tax
Who Does not Need to Pay Advance tax?
The following categories of taxpayers do not need to pay any Advance Tax:
1) If a taxpayer opts for the presumptive scheme of calculating business income under section 44AD @ 8% of turnover,
then he will be exempt from payment of Advance Tax for such business
2) A resident senior citizen (60 years or more) who does not have any income from business & profession, is not required to pay Advance Tax.
How is Interest Penalty u/s 234B Calculated?
The following key points should be kept in mind while doing calculations:
1) Interest is charged @ 1%
2) The nature of interest is simple interest
3) Interest is calculated @ 1% on Assessed Tax (Tax determined u/s 143(1)/ 147/153A) less Advance Tax paid.
4) Any fraction of month shall be considered as a full month for calculating interest
5) When calculating interest, the amount of taxes due shall be rounded off to the multiple of 100 and ignore any fraction of 100
Example of Calculation of Interest under Section 234B:
Example: 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.