Advance Tax: Interest And Penalties On Late Payment Last Updated : 08 Apr 2020

Many people end up paying penalties for late payment of their advance tax, only because they are not familiar with this requirement. Sometimes even tax refunds have to be returned.

Everyone whose earnings are not subject to TDS is liable to pay Advance Tax. If you are a salaried individual and TDS is being deducted from your salary, but you have income from other sources such as Fixed Deposit or Recurring Deposit interest, capital gains, rent from a house or a lottery prize, then you have to pay advance tax on this extra sources of income. Many people do not realise this until too late and then end up paying huge sums as interest and penalties to the Income tax Department.

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 2 sections:

  1. Section 234C
  2. Section 234B

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 is you do not pay:

  • 15% of your tax liability by June 15
  • 45% of your tax liability by September 15
  • 75% of your tax liability by December 15
  • 100% of your tax liability by March 15

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.

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%.

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