Section 234B of the Income Tax Act: Fines & Penalties Imposed by the IT Department

“Section 234B of the Income Tax Act imposes interest on defaults in advance tax payments, calculated at specified rates for a defined time period.” Section 234B of the Income Tax Act deals with the penal interest imposed by the income tax department on taxpayers who default in paying advance tax or delay their payments. This section outlines the fines and penalties applicable when there's a failure to comply with the rules and regulations stated in the Income Tax Act 1961. Interest calculation under Section 234B begins from the end of the financial year, such as FY 2023-24, starting from 1st April 2024. Understanding Section 234B is crucial as it directly impacts the taxpayer's liability and the eventual payable amount, particularly when managing TDS payments and utilising tax-saving provisions like life insurance or term plans.

What is Section 234B of the Income Tax Act?

Section 234B of the Income Tax Act is a provision that imposes a penalty on taxpayers who fail to pay advance tax by the due dates. This penalty is levied as simple interest on the unpaid amount of advance tax. The interest rate is typically 1% per month (or part thereof) from the due date of the instalment until the payment date. This penalty's specific rate and applicability may vary based on the taxpayer's estimated tax liability and other factors.

What is the Limit of 234B?

The limit of Section 234B is Rs. 10,000 in a financial year. This means that if a salaried employee's total tax liability for the year is less than Rs. 10,000, they are not subject to the late fee provisions of Section 234B. However, if their tax liability is equal to or exceeds Rs. 10,000, they will be charged a late fee if they fail to pay their taxes on time. The amount of the late fee will depend on the number of days the taxes are overdue.

What is Advanced Tax?

Advance Tax is a system where taxpayers are required to pay their tax liabilities in instalments throughout the financial year rather than in a single lump sum at the end. This applies to individuals and businesses whose total tax liability, after accounting for TDS (Tax Deducted at Source) and other deductions, exceeds Rs 10,000. The payments are made based on estimated income and tax calculations and are due on specific dates set by the Income Tax Department.

Who Should Pay Advance Tax?

All assesses, including salaried employees, self-employed professionals, freelancers, and businessmen, must pay advance tax if their total tax liability exceeds Rs 10,000 in a financial year. This requirement applies after reducing TDS (Tax Deducted at Source) or TCS (Tax Collected at Source) and reliefs under Sections 89 and 90. Individuals and businesses with a net income tax liability of Rs 10,000 or more must make advance tax payments to cover their estimated tax amount for the year.

What is the Interest for default in Payment of Advance tax Section 234B?

Section 234B mandates interest on taxpayers who fail to pay advance tax or pay less than 90% of their assessed tax. This interest is calculated at 1% per month or part thereof on the unpaid amount. The interest period begins on April 1st, the day following the financial year's end, and continues until the actual payment date. The interest is applicable if:

The taxpayer has not paid any advance tax.
The taxpayer has paid less than 90% of the assessed tax.
After considering reliefs under Sections 89 and 90, the taxpayer's tax liability exceeds Rs. 10,000.

If a taxpayer files an updated ITR and the assessed tax amount decreases, the interest under Section 234B is recalculated based on the revised amount.

Example:

Mr. Ramesh has an estimated tax liability of Rs. 50,000 for the financial year 2023-24. The due dates for advance tax instalments are June 15, September 15, and December 15. If Mr Ramesh fails to pay any advance tax instalments by their due dates, he will be subject to interest under Section 234B. The interest will be calculated at 1% per month from April 1, 2024 (the beginning of the financial year) until the date he pays the full amount of his assessed tax. For instance, if Mr. Ramesh pays the entire amount on July 15, 2024, he will be charged interest for three months (April, May, and June).

What does “Assessed Tax” mean?

Assessed Tax refers to the amount of tax a taxpayer must pay, determined under section 143(1) of the Income Tax Act. When tax is assessed through this section, the assessed tax equals the tax on total income before adding any interest or penalty. In the case of a regular assessment, the assessed tax is calculated by subtracting specific deductions—such as TDS/TCS amounts, tax relief under sections 89, 90, 90A, or 91, and tax credits under sections 115JAA or 115JD—from the total tax on income. Essentially, assessed tax represents the taxpayer's net tax liability after adjusting for taxes withheld, relief, or credits.

Conclusion

Section 234B of the Income Tax Act serves as a deterrent against non-compliance with advance tax payments. By imposing interest on unpaid amounts, it encourages timely tax obligations. Understanding this section is crucial for taxpayers to avoid financial penalties and ensure accurate tax calculations. Adhering to the advance tax payment schedule and accurately estimating tax liabilities can help mitigate interest charges and prevent unnecessary financial burdens.