Introduction:

In accordance with Section 234B of the Income Tax Act, 1961, taxpayers facing default or delay in advance tax payments are subject to a monthly interest charge of 1% on the assessed tax. This simple interest may also apply if the tax paid falls short of 90% of the assessed tax.

In this article, you will get a comprehensive insight into Section 234B of the Income Tax Act, including all the important information every taxpayer should know.

Section 234B:

Section 234B of the Income Tax Act was implemented with the aim of ensuring timely tax payments by taxpayers. It mandates interest charges for those who miss their advance tax deadlines. Interest accrues from the due date of each installment until the actual payment date.

As per Section 234B of the Income Tax Act, if a taxpayer doesn’t remit at least 90% of their assessed tax liability as advance tax, they incur an interest charge at a rate of 1% per month or part thereof on the outstanding tax amount. This interest is computed from the installment’s due date to the actual payment date.

Applicability of the Section 234B:

• Section 234B applies in the following circumstances.
• If the taxpayer hasn’t remitted the requisite advance tax amount, which is at least 90% of the assessed tax liability.
• If the taxpayer has not paid any tax in advance, and the entire tax liability has been settled at the time of filing the income returns.
• If the taxpayer has paid advance tax but remitted less than 90% of the assessed tax liability.

Advance Tax:

• Instead of paying the tax only once at the end of the year, taxpayers must pay taxes in advance. Advance tax payments are regular payments throughout the fiscal year, to be completed before its conclusion, as specified by the income tax department. This systematic approach enhances tax collection efficiency. Failure to comply incurs interest penalties as outlined in Section 234B of the Income Tax Act.
• All taxpayers, encompassing salaried employees, self-employed professionals, businessmen, and others, are obligated to pay advance tax if the remaining tax liability, after factoring in TDS/TCS/Relief under sections 89 and 90, amounts to Rs 10,000 or more.

Not eligible to pay Advance tax:

• As per Section 207 of the Income Tax Act, individuals who meet the following criteria are exempt from advance tax.
• Individual
• If the person is 60 years of age or older at any time of the year.
• The individual does not earn any income from business or profession.
• The individual is a resident in India as defined by the Income-tax Act.

Interest Charged Under Section 234B :

• Interest under section 234B is applicable in the following scenarios:
• You paid advance tax, but the amount you paid is less than 90% of the ‘assessed tax’.
• If the taxpayer files an updated ITR, the amount of advance tax paid is reduced only once for calculating the interest payable under section 234B (introduced in Budget 2023).
• If your tax liability, after adjustments for TDS/TCS/Relief under Sections 89 and 90 for the financial year, exceeds Rs.10,000, and you have not paid any advance tax.
• Interest at the rate of 1% is imposed on the unpaid advance tax amount. If there’s a deficit in advance tax payment, interest is charged accordingly. If the taxpayer fails to pay any advance tax, they’re liable to pay interest under Section 234B on the total assessed tax amount.

Assessed Tax:

• Assessed tax refers to the total taxable income minus the following deductions:
• Tax deductions or credits are allowed under the Income Tax Act, as mentioned in Sections 80C and 80D among others.
• Tax credits are available under Section 115 JAA or 115 JD.
• Tax deducted or collected at  source.

Avoiding  interest under Section 234B:

• To avoid charge of interest under Section 234B, taxpayers should ensure timely payment of required advance tax. They must calculate their annual tax liability and pay the minimum advance tax by the specified due dates set by the Tax Office. This proactive approach will help avoid interest payment penalty as per the Income Tax Act.
• One of the primary benefits of advance tax payments is the enhancement of financial planning for taxpayers. By assessing their tax liability and remitting taxes in installments, taxpayers can evade the strain of a substantial tax outlay at the fiscal year’s end. Consequently, this aids in superior cash flow management, minimizing the risk of financial strain.
• It is important to note that interest under Section 234B is calculated on the basis of the amount of tax payable. Taxpayers should therefore ensure that the next tax due is paid on time to avoid any interest.
• To avoid interest and penalty under Section 234B, taxpayers should accurately assess their annual tax liability and pay any installments of advance tax before the due dates specified by the Income Tax Department. Additionally, they must ensure remittance of at least 90% of the assessed tax liability as advance tax.
• In addition to interest, a taxpayer may also face potential penalties under Section 271(1)(c) of the Income Tax Act if they fail to meet the necessary advance tax payments. The penalty can amount to as much as 100% of the outstanding tax balance.

Section 234B With Example:

A total tax liability of ₹54,000 was due for FY 2021-22 for A, with no tax deductions at the source. On 5th March, she made an advance tax payment of ₹25,000. The remaining balance was settled when filing her income tax return on 17th June. Despite the advance tax payment, it’s imperative to verify if she fulfilled the requirement of paying at least 90% of the assessed tax as advance tax. Hence, 90% of ₹54,000 amounts to ₹48,600. However, A only deposited ₹25,000, falling short of the 90% requirement. Consequently, she is liable to pay interest under section 234B for April, May, and June. The interest calculation is as follows:

₹54,000 (assessed tax) – ₹25,000 (paid as advance tax) = ₹29,000

₹29,000 x 1% x 3 = ₹870.

Thus, A is liable for an interest payment of ₹870.

Conclusion:

In summary, Section 234B of the Income Tax Act stands as a crucial provision ensuring taxpayers’ prompt tax payments. To evade any interest or penalty charges, taxpayers ought to accurately assess their annual tax liability and remit advance tax in installments by the deadlines stipulated by the Income Tax Department. This proactive approach aids in improved financial management, mitigating the risk of financial strain.