In case you forget to pay your income tax on time due to some reason, you should be aware of the method of calculating the interest penalty under sections 234A, 234B, and 234C that you will have to pay in order to avoid any future confusion.
Section 234A: Delay in filing Income Tax Return:
All taxes should be paid before the end of a financial year. In case there is any outstanding tax, the balance should be paid and income tax returns filed on or before July 31 of every following assessment year (AY). If the tax returns are filed after this date, then the taxpayer is charged 1% simple interest every month of the outstanding tax amount. The interest is calculated from the due date of filing returns till the date the return is actually filed.
Calculating Interest Penalty:
Mr Roy has a total tax outstanding amounting to Rs 2,00,000 (including net of the advance tax paid and TDS, if any). He files his tax return on December 15 instead of July 31 of the assessment year. Since he missed the actual date to file a return, he is late by 5 months in paying tax.
The penalty is calculated as:
Interest = 200,000 x 1% x 5 = Rs. 10,000
Mr Roy will be paying Rs 10,000 extra, above the tax amount In case he fails to file his tax return, he will be required to pay 1% simple interest till March 31, which is the end of the assessment year. As seen in the illustration above, Mr Roy’s liability would be 8% of Rs. 2,00,000 which is Rs 16,000.
Section 234B: Incomplete Payment of Tax:
In case an individual has to pay Rs 10,000 or more as tax in a fiscal year, then advance tax is applicable. The tax dues that are paid at a specific time period, as regulated by the Income Tax Department are termed as advance taxes. Businessmen, self-employed professionals, and salaried employees are liable to pay advance tax, where tax payable amounts to Rs 10,000. Under Section 44AD, when a taxpayer opts for computing business income, which has a turnover of 8% on presumptive basis, he is exempted from paying advance tax. Senior citizens above 60 years and with no income also enjoy tax exemptions under this section.
The taxpayer should have paid the maximum amount (least 90%) of the total tax payable by the end of the financial year. Failure to pay the tax, if the amount is more than 10% of the liability, then a penalty of simple interest 1% will be charged under Section 234B.
Advance Tax means paying your tax dues based on the dates (usually quarterly) provided by the income tax department. If you don't pay advance tax, you may be liable to pay interest under section 234B.
Calculating Interest Penalty - With Example:
Rahul has to pay total tax of Rs 2,00,000 for the current fiscal year. TDS (Tax Deducted at Source) amounting to Rs 1, 82, 650 was deducted from the income. On March 25, Rahul paid Rs 7,000, while the balance amount of Rs 10,350 was paid on July 20. The penalty is calculated as under:
Before calculating interest penalty, it is necessary to check if the taxpayer is liable to pay interest under Section 234B.
Assessed tax = Total Tax - TDS
= Rs 2,00,000 - Rs 1,82,650
= Rs 17,350
90% of Rs 17,350 i.e. Rs 15,615 should have been paid as tax, as on March 31. Rohit, however, paid only Rs 7,000. Hence Rohit will have to pay interest penalty on the assessed tax.
Rs 15,600 (rounded figure considered) x 1% x 4 months (calculated till July) = Rs 624.
Hence Rohit will be liable to pay Rs 624, as penalty on the interest of the assessed tax, under Section 234B.
Section 243C: Delay in Periodic Payment of Tax:
Income tax should be paid on time every financial year to avoid interest and penalty on late payment. Advance tax can be paid on the dates mentioned below:
- 15% of advance tax on or before June 15 in case of corporate taxpayer.
- 45% and 30% tax advance to be paid by corporate and noncorporate taxpayer respectively, on or before September 15.
- 60% and 75% of tax advance by non-corporate and corporate taxpayers should be paid on or before December 15.
- 100% tax advance by both corporate and noncorporate taxpayers should be paid on or before March 15.
Calculating Interest Penalty:
The interest penalty is 1% of the tax amount due from the above mentioned dates till the actual payment date. The amount to be paid, is calculated after tax deductions under Sections 90, 91, and 115JD. Here’s is how interest penalty is calculated, under Section 234C:
- 1% interest rate per month for a period of 3 months is computed for advance tax less than 30% of the amount on or before September 15.
- In case advance tax is paid on or before December 15 is less than 60% of the taxable amount, interest of 1% for a period of 3 months is levied.
- For amount less than 100% of the advance tax paid on or before March 15, a simple interest of 1% per month is computed.
- If 15% of the amount is already deposited on or before June 12, and advance tax is less than 12%, then an interest of 1% per month for three months is levied.
- In case 45% of the tax is deposited on or before September 15, and advance tax is less than 36%, a penalty for 3 months is charged at 1% of the interest per month.
- When 75% tax is paid before December 15, and payable amount is less than 75%, 1% simple interest per month is computed for a period of 3 months.
- When advance tax to be paid is less than 100% of the amount already paid as tax, then a simple interest of 1% is charged.
There is no interest penalty charged, under the following circumstances:
- The taxpayer has paid the tax in full and advance tax on the income, in instalments before the end of the fiscal year.
- In case of failure to estimate amount of speculative income such as lottery, or capital gains.
These were some details regarding interest penalty calculation under Sections 234A, 234B, and 234C of the Income Tax Act. Pay all advance tax and dues on time to avoid fines and penalties.