Understanding Section 234B of the Income Tax Act

Income Tax

According to Section 234B of the Income Tax Act, an interest payment could be imposed if there’s a delay in the payment of advance tax. Such an interest may also be imposed if the advance tax payment amount is below 90% of the assessed tax.

Here’s everything you need to know about Section 234B of the Income Tax Act -what is advance tax, who should pay it and three scenarios where taxpayers will be liable to pay 1% interest. Read on!

What is Advance Tax?      

Advance tax is the tax paid in installments throughout the year instead of paying a lump sum at the end of the year. The installment payment has to be done on or before the due date set by the Income Tax Department. This process of advance tax payment helps in an efficient tax collection process. A defaulter of this tax will have to pay interest as per Section 234B of the Income Tax Act, 1961. 

Who Should Pay Advance Tax?

Any salaried, professional or self-employed individual with a total tax liability above INR 10,000 in a financial year should pay advance tax. They will only be paying the advance tax when their tax payable post adjustment of TDS (Tax Deducted at Source) is Rs. 10,000 or above. 

Also Read: A Step-By-Step Guide To Make TDS Payment Online

What is the Interest Charged under Section 234B?

An interest rate of 1% is subjected each month if:

• A taxpayer has failed to pay advance tax.
• Has paid a portion of it lower than 90% of the assessed amount.

The taxpayer will have to pay this interest till the date of delay in payment. 

The due date of advance tax payment is July 31 of the fiscal year. Any payment made after this date of the assessment year will come under chargeable delayed payments.

Understanding Section 234B With Examples

Let’s divide the applicable interest in the following three ways!

1. Case 1: There’s no TDS during the computation of taxes. The sum is above Rs.10,000, and an individual fails to pay advance tax. 

Let’s say, the tax amount payable by Rohit is Rs.60,000. There’s no TDS, and he has to pay Rs.60,000 as tax (this is above Rs.10,000). Hence, he will be paying advance tax. He paid this sum on June 15 while filing his ITR. In this case, he will be paying interest under Section 234B for the months of June, May and April.   

Therefore, Rohit will pay an interest of Rs.1,800 (3 x 1% x Rs.60,000) under Section 234B of the Income Tax Act. 

2. Case 2: The tax payable post subtraction of TDS is above Rs.10,000. An individual didn’t pay the advance tax.  

The tax liability of Mohan for FY 2020-21 is Rs. 80,000. The TDS is Rs. 40,000. He paid Rs. 5,000 in March and the balance in July. 

So, Mohan’s assessed tax amount = Tax liability – TDS = Rs. (80,000 – 40,000) = Rs. 40,000. His tax liability was Rs. 40,000 or 90% of the amount. Here, 90% of the tax amount = 90% x Rs. 40,000 = Rs. 36,000. Hence, by March he must have paid an advance tax of Rs. 36,000, but he paid just Rs. 5,000. 

The IT department will impose interest in the months of July, June, May and April for the delay in part payment of advance tax. 

Therefore, interest payable for Mohan = Rs. [4 x 1% x Rs. (36,000 – 5,000)] = Rs. 1,240.

3. Case 3: A taxpayer hasn’t paid the advance tax completely. He/she pays lower than 90% of the assessed amount, and interest will be applicable for this delay. 

The tax amount for Rita is Rs. 60,000, and she paid Rs. 20,000 as advance tax in March. While filing ITR in June, she paid the outstanding amount. She must have paid Rs. 54,000 (90% of Rs. 60,000) as advance tax. However, she has paid only Rs. 20,000, which is below 90% of the total amount. 

Now, Rita will have to pay interest for the months of June, May and April under Section 234B. The interest amount for Rita will be [3 x 1% x Rs.(60,000 – 20,000)] = Rs.1,200. 

Also Read: Section 234C Of The Income Tax Act: Interest On Default Of Advance Tax

Final Word

You must be up to date with the tax compliance. Otherwise, you will be liable to pay penalties by way of interest. Don’t forget to pay your advance tax on or before the due date to avoid interest payments under Section 234B of the Income Tax Act. 

FAQs on Section 234B

1. What do you mean by assessed tax?

The assessed tax requires the following to be subtracted from your income tax:

• Tax credit under Section 115JD/115JAA
• Tax deduction or tax relief such as those under Section 89 and Section 90
• Tax collected at source or tax deducted at source 

2. What is the tenure of imposition of interest under Section 234B?

As per Section 234B of the Income Tax Act, 1961, the IT Department will levy interest from the assessment year’s 1^st day till the time of the assessment under Section 143(1) or the regular assessment.    

3. Does Section 234B offer an advance tax exemption to any taxpayer?

Yes, Section 234B offers advance tax exemption to resident senior citizens. However, they should not have any earnings under the section of income from profession and business. Keep in mind that he/she must be above the age of 60.   

4. Does a company need to pay advance tax?

Partnership firms, companies and assessees availing presumptive taxation schemes will have to pay advance tax. Any taxpayer whose tax liability goes above Rs. 10,000 post subtraction of TCS or TDS will have to make an advance tax payment.   

5. What does Section 234A represent?

Under Section 234A, the Income Tax Department levies interest on a taxpayer for delaying income tax return (ITR) filing. The interest payable will be 1% each month/part of any month on the remaining tax amount. 

Before you go…

• Looking for instant 🚀 personal loans 24*7 anywhere, anytime? Get personal loans up to ₹20 lakh starting at 9.9% p.a. Install the Navi app now!!
• Or, maybe you’re looking to buy that house you’ve been eyeing 🏠 and you need a loan of up to ₹5 crore. Install the Navi app now and get instant in-principle approval right away! Interest rates starting at 7.89% p.a.
• How about an affordable health insurance policy👨‍⚕️ starting at a monthly premium of just ₹235? Install the Navi app now and get your policy in under 2 minutes.
• Instead, want to put your savings into action and kick-start your investment journey 💸 But don’t have time to do research. Invest now with Navi Nifty 50 Index Fund, sit back, and earn from the top 50 companies.

Disclaimer: Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.

This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information, and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.