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.
There are two cases in which interest u/s 234B is levied upon taxpayer:
The following categories of taxpayers do not need to pay any Advance Tax:
The following key points should be kept in mind while doing calculations:
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.