234B
Understanding Section 234B: Interest on Advance Tax Defaults
This post will discuss Section 234B of the Income Tax Act, including its consequences, how interest is calculated for delayed advance tax payments, and what taxpayers can do to avoid fines. Let us look at these sections:
What is section 234b of the income tax act ?
Section 234B of the Income Tax Act applies when taxpayers fail to pay their advance tax by the specified dates. In these situations, the unpaid advance tax is subject to 1% interest every month (or part of a month). Based on the taxpayer’s estimated tax liability, this interest is calculated from the due date until the tax is entirely paid.
What is an Advance Tax?
Advance Tax allows taxpayers to pay their taxes in instalments throughout the financial year instead of all at once. After correcting for TDS and other deductions, it applies to people and businesses whose total tax is above ₹10,000. These payments are based on estimated income and must be made on particular dates determined by the Income Tax Department.
Who Should Pay Advance Tax?
If your total tax burden for the financial year exceeds Rs 10,000, you must pay advance tax. This applies to salaried employees, self-employed professionals, freelancers, and business owners. The total amount is calculated after deducting TDS, TCS, and any reliefs under Sections 89 and 90. If your net tax liability is Rs 10,000 or higher, you must pay advance tax for the year.
Section 234B Interest For Default In Payment Of Advance Tax
Section 234B of the Income Tax Act charges interest to taxpayers who fail to pay advance tax or pay less than 90% of their total tax liability. The outstanding tax amount has a 1%interest rate per month or part of a month.
This interest is applicable if:
- No advance tax is paid during the year.
- Advance tax paid is less than 90% of the assessed tax.
- After relevant reliefs under Sections 89 and 90, the tax liability exceeds Rs.10,000.
The interest period begins on April 1 (after the financial year finishes) and continues until the assessed tax is fully paid. Suppose a taxpayer files an updated Income Tax Return (ITR), and the estimated tax is reduced. In that case, the interest is calculated using the lower tax amount.
Example:
Mr Amit’s total tax liability for the financial year 2023-24 is Rs. 50,000. He does not pay advance tax on the due dates of June 15, September 15, and December 15. As a result, interest under Section 234B is applicable. If Mr. Amit pays his taxes by July 15, 2024, interest will be calculated at 1% per month for three months (April, May, and June).
What is assessed tax?
The assessed tax is the tax a taxpayer must pay, as determined by section 143(1) of the Income Tax Act. This section calculates the tax based on total income, excluding any interest or penalties.
The assessed tax is calculated for regular assessments by deducting TDS/TCS, tax relief under sections 89, 90, 90A, or 91, and tax credits under sections 115JAA or 115JD from the total tax. Simply put, it is the net tax liability after deducting previously paid taxes, reliefs, and credits.
We have completed this post. Please leave your questions in the comments section below.
FAQs
1. What is the difference between Sections 234B and 234C interest?
Ans: Section 234C interest is calculated during the financial year. Section 234B, however, is calculated from the end of the financial year until the date of such tax payment.in the comments section below.
2. Why do you pay interest under the Income Tax Act?
Ans: If you fail to pay your taxes on time or do not follow the income tax rules and regulations, you will be penalized with interest.
3. What is the limit of Section 234B?
Ans: Taxpayers must pay at least 90% of their total tax bill before the end of the financial year. If they fail to do so and owe more than 10% of their entire tax due, they will face a 1% simple interest penalty under Section 234B.
4. How do I avoid paying section 234B or 234C interest?
Ans: You can avoid additional interest responsibility under sections 234B or 234C by paying the advance tax on time.
