Advance Tax Interest And Penalties

Advance tax, also called pay-as-you-earn tax, is tax that is paid in advance, in instalments, on certain dates that are fixed by the Income Tax Department. It is important to know what these dates are and pay your advance tax on time. Any tax-paying business or individual who is salaried or self-employed has to pay advance tax if their total tax liability exceeds Rs.10,000 in a financial year.

The only individuals who are exempt from this are senior citizens (aged 60 and above) who do not run a business or have a profession. Not knowing who is eligible to pay advance tax, or not knowing the due dates for it, can lead to late payments or no payments at all, which will attract heavy interest and penalties. Avoid this by understanding the importance of paying advance tax and the due dates for it.

Interest Applicable on Late Payment of Advance Tax

You are liable to pay advance tax before the end of the financial year in 4 deadlines: June 15, September 15, December 15 and March 15. If your advance tax is not paid according to schedule, then you will have to pay an interest on the late payment. The interest payable can be rounded off to the nearest hundred.

This interest falls under Two sections:

  1. Section 234C
  2. Section 234B

Interest for Default in Payment of Advance Tax Under Section 234C

Under this section, if advance tax is not paid on schedule, an interest of 1% will be charged. This interest is for deferment in instalments of advance tax.

You will have to pay interest of 1% on advance tax if you do not pay on installments:

Installment of advance tax Due Dates Advance Tax Payable
1st installment on or before June 15 15% of the total advance tax
2nd installment on or before September 15 45% of advance tax less advance tax already paid
3rd installment on or before December 15 75% of advance tax less advance tax already paid
4th installment on or before March 15 100% of advance tax less advance tax already paid

If your company or profession is registering ‘Profits and Gains’ for the first time, then you do not have to pay any interest on the due amount. The interest applicable is simple interest and not compound interest. The period for which you need to pay the interest will depend on how many months late you are on the payment. The interest is computed from the due date to the date of payment.

For example, let us say you were supposed to have paid Rs. 1 lakh as tax by September 15, but you make the payment only on December 15. Then you are liable to pay 1% interest for a period of 3 months. In this case, the interest would come to Rs. 3,000.

Interest for Default in Payment of Advance Tax Under Section 234B

Under this section, if you do not pay 90% of the tax payable before the end of the fiscal year, then an interest of 1% is applicable. That is, if have either not paid any tax for an assessment year, or paid less than 90% of the advance tax due, then you’ll have to pay 1% simple interest on the tax dues. This would be considered as defaulting of tax payment.

If you have not paid tax until the beginning of the next financial year, then interest is calculated from April 1 of the new fiscal year, until total income is determined under Section 143(1) or until when self-assessment tax is paid, whichever is earlier.

In addition to this, if you have been given a refund by the Income Tax Department but on assessment it is found that no refund or less refund was due to the taxpayer, then you would be asked to return the excess refund with an interest of 0.5%.

Section 234B Computations

Here are some illustrations of advance tax calculations to understand how advance tax under Section 234B is calculated:

Illustration 1:

Sreekanth’s total tax liability is Rs 54,000. He paid this amount on July 9th while filing his tax returns. His total tax liability exceeds Rs.10,000, so he has to pay advance tax and is also liable to pay interest under Section 234B.

To calculate the interest:

Rs 54,000 x 1% x 4 months = Rs 2,160

Sreekanth has to pay advance tax of Rs.2,160 as per Section 234B.

Illustration 2:

Arbaaz’s tax liability for the financial year is Rs.1,55,000. From his total income, Rs. 1,35,700 of TDS was deducted. He paid Rs 5,000 on 25 March and the balance amount of Rs 14,300 was paid during the filing of returns on July 20. Does he have to pay interest under Section 234B?

His assessed tax = Rs 1,55,000 (total tax) minus Rs 1,35,700 (TDS) = Rs 19,300

If he had paid 90% of the assessed tax, which is Rs 17,370, before 31 March, he would have not had to pay interest. However, since he paid only Rs 5,000 by the due date, he has to pay interest, which is calculated as given below:

Rs 19,300 (assessed tax) – Rs 5000 (Advance Tax) = Rs 14,300

Rs 14300 x 1% x 4 months = Rs 572.

Therefore, he has to pay Rs.572 as the interest payable under Section 234B.

FAQ's on Advance Tax Interest And Penalties

  1. How many instalments of advance tax are to be paid in one financial year?
  2. Advance tax has to be paid in three instalments of 30%, 40%, and 60% on 15 September, December, and March in a financial year.

  3. Does not paying advance tax in time attract a penalty?
  4. Yes, there is an interest to be paid if you don’t pay your advance tax on time.

  5. How can I avoid paying interest under Section 234C?
  6. The only way to avoid paying interest under Section 234C is to pay advance tax on time as per the scheduled dates provided by the Income Tax Department.

  7. How much interest is to be paid under Section 234B?
  8. Interest under Section 234B is 1% per month or part of the month for default in the payment of advance tax.

  9. Is Section 234B applicable to salaried individuals as well?
  10. Yes, Section 234B is applicable to salaried individuals as well.

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