Section 234B of the Income Tax Act

When one misses or forgets to pay advance tax, then he/she has to pay penalty in the form of interest under Section 234B of the Income Tax Act. This section is the second section of three sections of the Income Tax Act wherein interest is imposed by the IT department. This section talks about penalties and fines that the Income Tax department may impose for defaulters. The liabilities under this section may also arise when one becomes unable to pay advance taxes on time.

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Before knowing more about Section 234B in detail, let us first know about advance tax.

Advance Income Tax

If one has to pay Rs.10, 000 or more as taxes in a financial year, then you may be required to pay advance taxes. The meaning of advance tax is paying the dues of tax on the dates (most of the times quarterly) given by the income tax department. If one has not paid advance tax on time, then one may become liable to pay the interest as per Section 234B.

Who Should Pay Advance Tax?

All assesses even including the self-employed professionals, salaried employees, businessmen, etc. are needed to pay the Advance Tax. Here the payable tax even after reducing the TDS should be Rs.10, 000 or more.

Who Should Pay Interest Penalty as Per Section 234B?

All the businessmen, self-employed professionals, or salaried employees are needed to pay the Advance Tax where the payable tax is greater than or equal to Rs.10, 000. There are two main cases in which one has to pay the interest under Section 234B:

  • In case a taxpayer is required to pay the advance tax but he/she fails to do so.
  • In case a taxpayer has paid out the advance tax but the paid amount is less than 90% of the liable tax.

Payable Tax under Section 234B of Income Tax

The interest that is payable in Section 234B is applied only when:

  • The liabilities of tax for an individual for the financial year after the deduction of TDS is more than Rupees 10, 000 and he/she has not paid any advance tax.

Or

  • One has paid the advance taxes and the paid advance tax is not more than or equal to 90% of the ‘assessed tax’.

The interest under Section 234B is applicable in any of the above-mentioned cases. The interest is calculated at the rate of 1% on the assessed tax less the advance tax. The part of a month is rounded off into full month. The money on which the interest is calculated is as well rounded off in a way that some fraction of 100 can be ignored.

Calculation of Section 234B of Income Tax

Let us take examples to understand Section 234B of the Income Tax Act:

  • Example 1: A’s total tax liabilities are Rs.48, 000. She has paid this mentioned amount on 13th June while filing her Income Tax Return. However, no tax at the source. Since her total tax liability is more than Rs.10, 000, therefore she has to pay advance tax. So, Mrs. A is also liable to pay interest as per Section 234B of the Income Tax Act. The total calculation of interest, in this case, is Rs.48, 000 X 1% X 3 (for April, May, and June) = Rupees. 1, 440. In this way, Mrs. A has to pay Rs.1, 440 as interest under section 234B of the Income Tax Act.
  • Example 2: The total tax that Mr. B has to pay for the financial year is Rs.55, 000, from which he has paid Rs.47, 000 by 31st March as a part of advance tax. However, the remaining amount of Rs.8, 000 is paid by him while he was filing the Income Tax Return on May 30th. Even though Mr. B has paid the advance tax, but we should check whether the advance tax paid is 90% of his total tax liability or not. A total payable tax of Mr. B is Rs.55, 000 and 90% of this taxable amount are Rs.49, 500. Mr. B has paid Rs.47, 000, which is not equal to 90% of the liable tax. Therefore, he has to pay interest as per Section 234B of the Income Tax Act.

Calculation of Interest in This Case is:

Rs.55, 000 (assessed tax) – Rs.47, 000 (advance tax) = Rs.8, 000

8, 000 X1% X 2 (April and May) = Rs. 160

The interest that Mr. B has to pay with his tax liability as per Section 234B is Rs.160.

Who Should Not Pay Advance Tax?

The following categories of people or taxpayers do not have to pay any Advance Tax:

  • If the taxpayer is a senior citizen (more than 60 years of age) who do not have any income from profession or business is not needed to pay the advance tax.
  • If the taxpayer takes the presumptive scheme to calculate business income as per Section 44AD at a turnover of 8%, then he/she will be free from paying any Advance Tax for business.

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