How Do We Calculate Interest on Assessed Tax Under Section 234B and 234C of Indian Income Tax Act?
A Detailed Guide to Interest Liability calculation for Default and Deferment in Advance Tax Payments follows.
Introduction
Under the Indian Income Tax Act, taxpayers are required to pay advance tax if their tax liability exceeds a specified threshold. Failure to comply with advance tax provisions attracts interest penalties under Sections 234B and 234C. Understanding how interest is calculated under these sections is essential for accurate tax planning and compliance.
Section 234B deals with Interest for Default in Payment of Advance Tax
Section 234B deals with interest liability when a taxpayer fails to pay advance tax or pays less than 90% of the assessed tax. This section applies to both individuals and companies whose tax liability after reducing TDS (Tax Deducted at Source) exceeds Rs. 10,000 in a financial year. Interest is charged at the rate of 1% per month or part of a month, starting from April 1 following the financial year until the date of determination of income under Section 143(1) or regular assessment under Section 143(3).
Calculation Method
- Determine the assessed tax: This is the total tax liability (including surcharge and cess) minus TDS/TCS and relief (if any).
- Subtract advance tax or self-assessment tax paid (if any).
- If the amount paid is less than 90% of the assessed tax, interest is calculated on the shortfall.
- Interest is levied at 1% per month or part of a month on the shortfall amount, from April 1 of the assessment year to the date of assessment.
Illustration
Suppose an individual’s assessed tax is Rs. 1,00,000, and he has paid Rs. 60,000 as advance tax and Rs. 10,000 is deducted as TDS. The total paid is Rs. 70,000. Since 90% of Rs. 1,00,000 is Rs. 90,000, and the individual has paid less, interest under Section 234B will be levied on Rs. 30,000 (total liability of 100000 minus the sum of the TDS and advance and self-assessment tax paid i.e. 70000) for each month or part of a month from April 1 until the date of assessment.
Section 234C deals with Interest for Deferment in paying Advance Tax
Section 234C imposes interest for non-payment or short payment of installments of advance tax as per the prescribed schedule. The advance tax is to be paid in installments on specified dates during the financial year.
Installment Due Dates for Non-Corporate Taxpayers
- 15th June: At least 15% of advance tax
- 15th September: At least 45% of advance tax (cumulative)
- 15th December: At least 75% of advance tax (cumulative)
- 15th March: 100% of advance tax
Calculation Method
- Calculate the required advance tax for each installment
- Determine the amount paid up to each installment date.
- If payment is less than the required amount, interest is charged at 1% per month
or part of a month on the shortfall, for a fixed number of months
Interest under section 234C is levied for a period of 3 months, in case of short
fall in
payment of 1st, 2nd and 3rd installment and for 1 month, in case of short fall
in
payment
of last installment.
- June installment: 3 months (June to September)
- September installment: 3 months (September to December)
- December installment: 3 months (December to March)
- Last installment: 1 month
Illustration
If the advance tax liability is Rs. 1,00,000 and the taxpayer pays only Rs. 10,000 by June 15 (instead of Rs. 15,000), the shortfall is Rs. 5,000. Interest of Rs. 150 (Rs. 5,000 x 1% x 3 months) will be charged for this installment. Similar calculations apply for subsequent installments.
Amendment
As per the recent amendments to the income tax act, there is a specific provision under Section 234C which allows for a waiver of interest if the shortfall in payment of the first or second installment of advance tax is due to the fact that the taxpayer has paid at least 12% and 36% respectively of the assessed tax by the due dates of the first and second installments. In such cases, interest for shortfall may not be levied for those installments, provided the shortfall is made up in subsequent installments as per the prescribed schedule.
The calculator above takes into account this amendment for the AY 2025-26 and further.
Exceptions
- No interest under Section 234C is charged if the shortfall is due to income under the head “Capital Gains” or winnings from lotteries, provided the advance tax is paid on such income by March 31.
- Interest under Sections 234B and 234C is mandatory and cannot be waived by the Assessing Officer.
- Interest is calculated on the amount of shortfall or deferred payment, not on the total tax liability.
Calculator Features, Display, And User Interface
- This interest calculator for sections 234B and 234C features a user-friendly interface, accompanied by this comprehensive guide designed to facilitate understanding of these interest calculations.
- The calculator provided applies the relevant amendments and accurately computes interest in accordance with sections 234B and 234C. Its calculations closely align with the methodology employed by the Income Tax Department.
- The calculation of interest under section 234C is presented in a tabular format, detailing each of the four installments for cases where presumptive taxation is not opted, and a single installment for cases where presumptive taxation is chosen. The table specifies the shortfall, the expected required amount, and the cumulative interest at each stage (current interest plus any interest accrued from prior installments).
- The interest calculation may be exported as a PDF document for sharing with others.
- Disclaimer: While this calculator provides accurate and comprehensive results, it is advisable to seek guidance from a taxation professional or Chartered Accountant for your income tax return filing requirements.