How To Calculate Interest Under Section 234C?

Understand How to Calculate Interest Under Section 234C

Decoding Section 234C

Section 234C of the Income Tax Act is one of those deceptively simple provisions that often surprises taxpayers, and occasionally even seasoned professionals during return filing. It deals with interest for deferment of advance tax, i.e., when the taxpayer pays advance tax late or in insufficient amounts across the four statutory installments.

What Section 234C Really Covers?

Section 234C applies when a taxpayer fails to pay the prescribed percentage of advance tax by each installment date. The law mandates simple interest at 1% per month for a fixed period of three months for the first three installments, and 1% for one month for the March installment. The statutory installments are:

Assessed tax = Total tax liability – TDS/TCS – Relief under Section 90/90A/91.

It should be noted that Tax Deducted at Source (TDS) is always treated as advance tax when assessing tax liability. TDS, together with reliefs under Sections 90, 90A, and 91, is deducted from the net tax payable to determine the assessed tax for the purpose of interest calculation.

Advance Tax Installment Dates

Please do not miss them as a taxpayer to avoid interest.

Installment Date	Required % of assessed tax	Interest Levied for	Interest rate per month	Amendments or Special Provisions
15 June	15%	3 Months	1%	If minimum of 12% of assessed tax is paid, no intertest is levied.
15 September	45%	3 Months	1%	If minimum of 36% of assessed tax is paid, no intertest is levied.
15 December	75%	3 Months	1%	None
15 March	100%	1 Month	1%	None

How the Interest Is Calculated?

Interest is charged on the shortfall from the required percentage for each installment. For example, if the taxpayer should have paid 45% by 15 September but has paid only 20%, interest applies on the 25% shortfall for three months at 1% per month. Rule 119A governs rounding rules for interest computation in which fractions of months are treated as full months, and tax amounts are rounded to the nearest ₹100.

Special Case: Presumptive Taxpayers (44AD/44ADA)

They must pay 100% of their advance tax by 15 March.
If they fail to do so, interest at 1% for one month applies on the shortfall.

They are not required to meet the June/September/December installments.

Important Exceptions (No 234C Interest)

Section 234C does not apply when the shortfall is due to under estimation of:

Capital gains
Lottery, crossword, gambling income
First time business/profession income
Dividend income

The taxpayer must, however, pay the tax on such income as soon as it arises.

Practical Subtleties for Professionals

234C is installment based, not cumulative
Even if the taxpayer pays excess in later installments, interest for earlier shortfalls does not get reversed.
March installment is unique
Interest is only for one month, even if paid after 15 March but before 31 March.

Example Calculation

Let's assume the FY to be 2024-25. Arvind owns an engineering consultancy firm. His total tax liability for the year amounts to Rs. 54,000. He has made the following advance tax payments:

Rs. 9,500 on 15th June 2024
Rs. 12,500 on 15th September 2024
Rs. 13,500 on 15th December 2024
Rs. 18,500 on 15th March 2025

Arvind has not opted for the presumptive taxation scheme under section 44ADA. Let us determine whether Arvind is required to pay interest under section 234C, and if so, how much. Every individual whose estimated tax liability for the financial year exceeds Rs. 10,000 must pay advance tax. Any tax paid up to 31st March is considered as advance tax. Based on these dates, Arvind’s advance tax liability at each instalment is calculated as follows:

First Instalment (15th June): At least 15% of the total tax payable should be paid by this date. 15% of Rs. 54,000 is Rs. 8,100. Arvind paid Rs. 9,500 on 15th June, which exceeds the required amount. Therefore, there is no shortfall in the first instalment.
Second Instalment (15th September): At least 45% of the total tax payable should be paid by this date. 45% of Rs. 54,000 is Rs. 24,300. By 15th September, Arvind has paid a total of Rs. 22,000 (Rs. 9,500 + Rs. 12,500). There is a short payment of Rs. 2,300 (Rs. 24,300 – Rs. 22,000). However, as Arvind has paid a minimum of 36% of the advance tax by 15th September (36% of Rs. 54,000 is Rs. 19,440; he has paid Rs. 22,000), no interest under section 234C will apply for the deferment of the second instalment.
Third Instalment (15th December): At least 75% of the total tax payable should be paid by this date. 75% of Rs. 54,000 is Rs. 40,500. By 15th December, he has paid Rs. 35,500 in total (Rs. 9,500 + Rs. 12,500 + Rs. 13,500). This results in a short payment of Rs. 5,000 (Rs. 40,500 – Rs. 35,500). Thus, Arvind will be liable to pay interest under section 234C for this shortfall.
Final Instalment (15th March): By this date, 100% of the tax payable should be settled. Arvind has paid the full tax liability of Rs. 54,000 by 15th March (Rs. 9,500 + Rs. 12,500 + Rs. 13,500 + Rs. 18,500), so there is no shortfall in the final instalment.

The only shortfall occurs in the third instalment, amounting to Rs. 5,000. Interest under section 234C is charged at 1% per month or part thereof on the short-paid amount for three months. Hence, the interest payable is Rs. 150 (Rs. 5,000 × 1% × 3 months). In summary, Arvind is liable to pay interest of Rs. 150 under section 234C due to the shortfall in the third instalment of advance tax. We invite you to use our complimentary interest calculator for sections 234C on assessed tax. Access the tool here. Our calculator efficiently and accurately processes amendments, special provisions, and calculations under the presumptive income scheme..