The present article covers interest provisions as prescribed under section 234B of the Income Tax Act. Notably, section 234B is applicable when the taxpayer defaults in payment of advance tax.
Advance tax vis-à-vis interest payable thereon-
In terms of section 208, the taxpayer is liable to pay advance tax during the financial year in which the amount of tax payable is INR 10,000 or more.
In case the taxpayer fails to pay the advance tax or pays less advance tax. Then for such default, interest would be payable under section 234B.
Applicability of interest provisions of section 234B of the Income Tax Act-
As per provisions of section 234B, interest will be applicable/ payable only under the following two situations-
1. The taxpayer is liable to pay advance tax. However, he fails to pay the same; or
2. The taxpayer has paid the advance tax. However, the amount paid is less than 90% of the assessed tax.
Meaning of the term assessed tax-
Explanation 1 to section 234B covers the definition of the term ‘assessed tax’. The same means as under-
1. When the tax is determined under section 143(1)-
Assessed tax = tax on total income as determined under section 143(1).
2. When the tax is determined via regular assessment-
In case the taxpayer defaults in paying advance tax (as explained above), he would be liable to pay simple interest @1% per month or part thereof under section 234B of the Income Tax Act.
Interest under section 234B of the Income Tax Act will be payable on the amount determined as under-
|Particulars||Amount on which interest is payable under section 234B|
|In case of short fall of advance tax||Interest will be payable on-
Assessed Tax XXXX
(-) Amount of advance tax paid (XXXX)
|In case the advance tax is not paid||Interest will be payable on the amount of assessed tax.|
Period of levy of interest differs in a different situation. The same is explained hereunder-
|Particulars||Period for which interest will be payable|
|Regular assessment||From the first day of the assessment year i.e. 1st April till the date of regular assessment|
|Total income determined under section 143(1)||From the first day of the assessment year i.e. 1st April till the date of determination of total income under section 143(1)|
|Re-assessment/ Re-computation||From the first day of the assessment year i.e. 1st April till the date of re-assessment or re-computation.|
|Order of settlement commission||From the first day of the assessment year i.e. 1st April till the date of the order of the settlement commission.|
Let us go through the following illustrations for a better understanding of provisions of section 234B–
Mr. A is having total tax liability of INR 39,700. He has not paid any advance tax. However, he is having a TDS credit of INR 5,000. He pays the entire tax liability of INR 34,700 (i.e., INR 39,700 – INR 5,000) on 31st July.
Now, since the net tax liability is INR 34,700 is more than INR 10,000, Mr. A is liable to pay advance tax. Since no advance tax is paid by him, he will be liable to pay interest under section 234B. Interest under section 234B will be payable as under-
|Assessed tax (INR 39,700 – INR 5,000)||INR 34,700|
|Amount on which interest will be payable||INR 34,700|
|Rate of interest||Simple interest @1% per month|
|Period for which interest will be payable||1st April to 31st July (i.e., 4 months)|
|Interest payable under section 234B
(INR 34,700 * 1% * 4 months)
Continuing the above illustration, let us assume that Mr. A has paid INR 10,000 as advance tax. However, the advance tax so paid is less than 90% [i.e., INR 33,660 (INR 34,700 * 90%)]. Accordingly, interest under section 234B will be payable as under-
|Interest under section 234B||= (Assessed tax – advance tax paid) * 1% * 4 months|
|= (INR 34,700 – INR 10,000) * 1% * 4 months|
|= INR 988.|