Interest Imposed by the IT Department Section 234B

Part II: Section 234 B
(Interest for not Paying Advance Tax)

What is Advance Tax?
Advance tax is also called “Pay as you Earn” Tax, which means that you are liable to pay taxes on income generated, at the time such income is received and not at the end of the financial year.

So if your income tax liability is Rs.10,000 or more in a financial year, you are liable to pay advance tax. This advance tax has to be paid in installments during the financial year, instead of making a lump sum payment at the end of the year.

Who needs to pay Advance Tax?
All assesses including salaried employees, self-employed professionals, businessmen etc. are required to pay Advance Tax where the tax payable is Rs 10,000 or more.

Interest Imposed by the IT Department Section 234B

Advance Tax is NOT applicable when –

Effective AY 2011-12 – When a taxpayer opts for the scheme of computing business income under section 44AD on presumptive basis @ 8% of turnover, such taxpayer shall be exempted from payment of advance tax for such business.
Effective AY 2013-14 – A senior citizen (resident individual who is 60 yrs or more) who does not have any income from business & profession, is not liable to pay advance tax.

Late Payment Interest

You need to pay at least 90% of your total advance tax liability before 31st March to avoid interest.No interest is applicable if the outstanding tax amount is less than 10% of the total tax liability for the financial year.

Interest Imposed by the IT Department Section 234B

The interest is set at 1% simple interest per month. The amount on which interest is calculated is your final tax liability less advance tax already paid, if any less TDS. if any, calculated from 1st April till the time you pay the total outstanding tax amount.

Interest Imposed by the IT Department Section 234B

Illustration

Assume that the total tax Mr X needs to pay for the financial year is Rs. 100,000. He had paid Rs 30,000 in February. Mr X paid the balance amount on 20th July, i.e. 4 months late. 90% of Mr X’s tax is Rs 90,000 which should have been paid by 31st March. Since only Rs 30,000 has been paid interest under section 234B is applicable.

Interest under section 234B = 70,000 x 1% x 4 = Rs. 2800

This Rs. 2,800 is the interest, payable over and above Mr X’s actual tax liability.