Interest Under Section 234A, 234B, & 234C

Interest under sections 234A, 234B, and 234C are crucial provisions under the Indian Income Tax Act that deal with the imposition of interest charges for various non-compliance scenarios. These sections aim to ensure timely tax payments and compliance with tax regulations. 

Understanding the implications of these provisions is essential for taxpayers to avoid penalties and minimize financial burdens. In this article, we will explore the key aspects of interest u/s 234A, 234B, and 234C.

What is Section 234A: Default in furnishing the return of Income 

Interest under section 234A of the Income Tax Act is pertinent to the late filing of income tax returns. This section mandates the payment of interest charges in case a taxpayer fails to file their income tax return by the prescribed due date.

The purpose of section 234A is to encourage taxpayers to file their income tax returns within the prescribed time limit, which is typically on or before the due date, usually July 31st of the assessment year. Failing to meet this deadline results in the taxpayer incurring interest charges.

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Interest Under Section 234A of the Income Tax Act

The interest is calculated at a rate of 1% per month or part thereof, based on the outstanding tax liability. It starts accruing from the due date of filing the return until the actual date of filing. 

It is important to note that this interest is separate from any penalties that may be applicable for late filing. Therefore, taxpayers should ensure the timely filing of their returns to avoid the interest charges under section 234A. 

If a taxpayer fails to file their income tax return within the prescribed time limit, they become liable to pay simple interest at a rate of 1% per month or part of a month. This interest is calculated from the due date of filing the return until the actual date when the return is furnished. 

The time limit referred to here corresponds to the deadlines mentioned in section 139(1) of the Indian Income Tax Act, which is July 31st for individuals and Hindu Undivided Families (HUFs), and September 30th for all other cases.

For Example-  Mr. Avinash is a salaried employee with multiple income sources like interest income, and rental income for the financial year 2021-22. Now, he is liable for tax of Rs. 70,000 & he earlier filed his income tax return in October 2022. However, he missed the deadline which was 31st July, thus he has to pay interest under section 234A. The interest calculation will be as follows-

Original Due Date: July 31st of 2022

Actual Date of Filing: 15th October 2022

Dealy of month: 3 months 

So, interest will be 70,000*1*0.03 = 2100

Imp- The taxpayer will not incur any interest charges under section 234A if they have paid the self-assessment tax on or before the due date for filing their income tax return.

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Section 234B: Default in payment of Advance Tax

Section 234B of the Income Tax Act pertains to the interest charged on an underpayment or non-payment of advance tax. Taxpayers must estimate their annual tax liability and make timely payments of the due amount as advance tax in installments throughout the financial year. 

The purpose of advance tax is to ensure the steady collection of taxes and prevent a significant tax burden at the end of the financial year.

If a taxpayer fails to pay the required amount of advance tax or pays less than 90% of the assessed tax liability, they become liable for interest charges under section 234B. This provision aims to discourage taxpayers from deferring their tax payments or significantly underestimating their tax liability.

Interest under section 234B

If an assessee is required to pay advance tax but fails to do so, or if the advance tax paid is less than 90% of the assessed tax, they become liable to pay simple interest at a rate of 1% per month or part of a month. 

The interest calculation period begins on April 1st of the next financial year and extends to the date of determination of the total income under Section 143(1). However, if a regular assessment is completed under Section 143(3), the interest is charged up to the date of the regular assessment.

The interest is calculated based on the assessed tax amount or the difference between the advance tax paid and the assessed tax amount. If no advance tax is paid, the interest is calculated on the assessed tax. To save interest under section 234B, it is advisable to pay at least 90% of the expected tax liability, after considering any applicable TDS deductions, before March 31st.

It's important to note that advance tax is generally required to be paid as per the due dates specified in the Income Tax Act. However, no advance tax is required to be paid if the tax payable is less than Rs. 10,000 or if the assessee is a senior citizen without any income from a business or profession.

For Example- Anuradha has a total tax liability of Rs 80,000 for the financial 2021-22 & she has a TDS of Rs 10,000 and has not paid any advance tax before March 31st of 2022. She paid the taxes while filing her income tax returns in July 2022. As she has not paid 90% of the total tax payable as advance tax, she is liable to pay interest under section 234B. 

Tax Payable - 80,000

Less - 10,000

Total Tax Payable - 70,000

Date of tax payment - 31st July of 2022

Delayed Months - 4 Month

Interest will be 70,000 * 1 * 0.04 = 2800

Section 234C: Deferment of Advance Tax 

Section 234C of the Indian Income Tax Act deals with the interest charges levied on the deferment or delay in the payment of installments of advance tax. Under the income tax system in India, taxpayers are required to estimate their annual tax liability and make timely payments of advance tax in installments throughout the financial year. 

Section 234C aims to ensure regular and timely payment of advance tax by imposing interest charges for any deferment or delay in such payments. The provision specifies different due dates for payment of advance tax installments during the financial year. 

If a taxpayer fails to pay the required amount or pays an amount lower than the prescribed installment, they become liable for interest charges under section 234C.

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Interest Under Section 234C of the Income Tax Act

When the advance tax payments are either underestimated or not made at all, Section 234C comes into effect. In such cases, interest is charged based on the difference between the actual installment paid and the installment that should have been paid. 

The calculation of interest under Section 234C follows a specific rule. For each period of deferment, an interest rate of 1% per month is applied for a duration of 3 months. However, for the final installment due on 15th March, the interest is calculated at 1% for a duration of 1 month only.

The interest under Section 234C is calculated separately for each installment and is based on the amount of the shortfall and the specific due dates for each installment. The interest rates and installment due dates are predetermined by the income tax authorities.

Following is the schedule for the payment of advance tax defined by the department.

Due Date	Advance tax payable for all taxpayers other than assesses opting for presumptive income under Section 44AD	Advance tax payable for taxpayers opting for the presumptive income scheme under Section 44AD
15th June	Up to 15 percent of the total amount payable	NIL
15th September	Up to 45 percent of the total amount payable	NIL
15th December	Up to 75 percent of the total amount payable	NIL
15th March	Up to 100 percent of the total amount owed	100% advance tax payable

FAQs

• What is the purpose of interest under Section 234A, 234B, and 234C?

The interest charged under these sections aims to encourage timely payment of taxes and penalize taxpayers for the delay or shortfall in paying advance tax or filing the income tax return.

• Who is liable to pay interest under Section 234A?

Any taxpayer who fails to file their income tax return within the prescribed time limit, as mentioned in Section 139(1), may be liable to pay interest under Section 234A.

• How is interest under Section 234A calculated?

Interest under Section 234A is calculated at a rate of 1% per month or part thereof, starting from the due date of filing the return until the date of actual filing of the return along with the payment of tax liability.

• Are there any exceptions where interest under Section 234A is not charged?

No interest under Section 234A is charged if the tax payable is nil or if a refund is due to the taxpayer.

• When does interest under Section 234B apply?

Interest under Section 234B applies when a taxpayer fails to pay at least 90% of their assessed tax liability as advance tax. It is charged if the advance tax paid is less than the prescribed amount or if no advance tax is paid.

• How is interest under Section 234B calculated?

The interest under Section 234B is calculated based on the shortfall in the payment of advance tax. It is charged at a rate of 1% per month or part thereof, starting from the first day of the next financial year until the date of determination of total income or the date of regular assessment.

• What triggers interest under Section 234C?

Interest under Section 234C is triggered when a taxpayer makes underestimated or delayed payment of advance tax installments during the financial year.

Also, Read: "Tax exemption limit for leave encashment upon retirement".

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