Calculation of interest under section 234A, 234B and 234C

The Income Tax Act, 1961 (herein referred as the ‘Act’) requires Income tax returns to be filed on time; advance tax to be paid correctly and within the prescribed time limit under the act. In case the assessee fails to comply with the provisions of the Act, interest shall be chargeable under Sections 234A, 234B and 234C of the Income Tax Act, 1961.

Interest on defaults in furnishing return of income – Section 234A of the Act

If the assessee fails to file the return of income before the due date of filing the return*, he shall be liable to pay the simple interest @ 1% per month or part of the month. The calculation of interest shall start from the date immediately following the due date of filing the return and end of actual date of filing the return, or the date of completion of assessment under section 144 of the Act, if the return is not filed.

This calculation of 1% per month is done on the amount of the tax payable as reduced by the advance taxes or TDS deducted.

Hence, in case of a ‘NIL’ return, or a return in which there is tax refundable, no interest under section 234A is levied.

*Due dates of filing the return of income is dates prescribed under section 139(1) of the Act.

i.e, 31^st July (date extended upto 31^st August for FY 2017-18) in case of individuals/HUF, and, 30^th September in case of other assessee.

Let us understand this with an Example:

1. An individual, aged 50 years, having total income of Rs. 15 lakhs files the return of income on 25^th September of the relevant AY. His tax liability after all the deductions is Rs. 2,10,000.

Then, he is liable to file the return on or before 31^st July since he is an individual.

Tax = 210,000

Delay in months or part of the months = 2 months (i.e, August and September)

Interest = 21,0,000*1%*2 = Rs. 4,200

2. A company having Total income of Rs 30 lakhs files the return on 30^th December of relevant AY. Tax liability is 9 lakhs.

The assessee is required to file the return on or before 30^th September

Tax Liability= 9 lakhs

Delay in months= 3months

Interest under section 234A= 9lakhs*1%*3 = 27,000

3. An individual having total income of 3 lakhs. TDS deducted Rs. 30,000. The total amount was refundable. He filed the return on 30^th In this case even though the assessee is liable to file the return on or before 31^st July, he will not be liable to pay interest on delayed filing of return since he has tax refundable.

However, he is required to pay the fine of Rs 1000 from AY 2018-19 onwards under section 234F of the Act since his income does not exceed Rs. 5 lakhs (For AY 2018-19 the date has been extended to 31^st Aug, so the fine is levied only after 31^st Aug for the said AY)

Interest on defaults in payment of Advance tax – Section 234B of the Act

If any assessee who is liable to pay advance tax fails to pay such advance tax, or where the advance tax paid is less than 90% of the total tax assessed, he shall be liable to pay simple interest @ 1% per month or part of the month. The calculation of interest shall start from the 1^st day of April of the relevant Assessment year and end on the date on which tax is determined under section 143 (1), or date of regular assessment under section 143(3) if the regular assessment is done.

The interest is calculated on total tax payable by the assessee in case no advance tax is paid, or on amount which falls short of 90% of total tax in case advance tax is been paid.

Crux:  Under this section, only 90% of total tax is seen for calculation of interest on tax.

NOTE: Assessee is required to pay advance tax only if his total tax liability is more than Rs.10,000 on the prescribed due dates.  So no interest shall be charged if total tax liability is less than 10,000 and 90% of tax has not been paid. However, as per section 207, a resident senior citizen (i.e., an individual of the age of 60 years or above) not having any income from business or profession is not liable to pay advance tax.

Please Read: Senior Citizens not having Business Income exempt From Advance tax

Due Dates for payment of Advance Tax

Corporate assessee and Non Corporate assessee

For assessee who discloses their income under the presumptive taxation scheme under section 44AD(1)/44ADA(1), entire advance tax is required to be paid on 15^th March.

Let us understand this section with an Example:

1. An Assessee has total tax liability is Rs 40,000. He paid this amount on 15th June of the relevant AY. No tax was deducted at source.

His total tax liability is more than Rs 10,000, so he was liable to pay advance tax. As a result, he will be liable to pay interest under section 234B.

Interest chargeable under section 234B= 40000*1%*3 (ie for the period of April –June of AY) = Rs.1,200

2. An assessee has a total tax liability of Rs. 55000. Advance taxes paid on 20^th March is Rs.48,000. Remaining Rs.7000 was paid on the date of filing the return ie 31^st

Here, even though the assessee has paid taxes, it is to be checked that 90% of total tax liability has been paid to comply with the provision of section 234B. If the payment falls short of 90% of the tax required to be paid, the interest under section 234B shall be charged.

90% of 55000= 49,500

Tax paid = Rs. 48,000

Hence there is a shortfall of payment.

Interest charged under section 234B = (55000-48000)*1%*4 (ie period from April – July) = 7000*1%*4 = Rs. 280

3. An assessee has total tax liability of Rs 20,000. TDS was deducted Rs. 18000.

The assessee is required to pay advance tax since total tax liability is more than 10,000. Also he must pay 90% of advance tax before 31^st March to comply with the provision of section 234B.

Tax assessed = 20,000 – 18000 = Rs. 2000

Say, he paid Rs.1000 on 30^th March and the rest on date of filing the return.

But he is required to pay at least 90% of Rs. 2000 before 31^st march, i.e, 2000*90% = Rs. 1800

So, the interest under section 234B = (Amount of advance tax – amount paid)*1%*4months

=Rs. (2000 – 1000)*1%*4 months (i.e, April – July)

=Rs. 1000*1%*4

=Rs. 40

Note:  The advance tax after reducing the TDS from total tax liability is seen for the purpose of this section.

Interest on deferment in payment of Advance tax – Section 234C of the Act

If the advance tax paid is less than the amount that is required to be paid as on prescribed due dates (due dates and instalments given above) , or is not paid at all, the assessee is required to pay simple interest under section 234C at the rate of 1% per month or part for the month is charged for period of default.

The interest is calculated on the difference between the amounts required to be paid less the amount actually paid.

Let us understand this better:-

Let us understand this section with an Example:

1. Tax liability is 300,000 and TDS deducted 50,000

Advance tax paid on 15^th June 30,000

Advance tax paid on 15^th Sept 80,000

Advance tax paid on 15^th Dec 70,000

Advance tax paid on 15^th March 60,000

Advance tax assessed for the year = Rs. (300,000-50,000) = Rs. 250,000