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26/08/2015

Filing Income Tax Return: Interest Under Section 234B Explained

As you prepare to file your return and pay the due tax, are you surprised to see a couple of hundreds charged as interest under Section 234B of the Income Tax Act? Let's understand this interest and why it is charged in your tax return.
 
What is advance tax?
For those who have a tax liability in excess of Rs 10,000 in a financial year, the Income Tax Department requires them to pay advance tax. Advance tax means paying your tax dues in instalments on the dates (usually quarterly) provided by the I-T department. If you are salaried and your total income is largely from salary, barring a small amount earned as interest, it is likely all your taxes have been taken care of by TDS (tax deducted at source). Your employer deducts TDS and banks also deduct TDS on interest income. But if during the year you have earned income under any other head you may have to pay advance tax. For example, you may be salaried but if you have rental income, you must check whether tax paid by you is sufficient or not and pay advance tax as per percentages and dates laid out by the tax department.
 
If you don't pay advance tax, you may be liable to pay interest under Section 234B.
 
Who needs to pay advance tax?
All assesses including salaried employees, freelancers, businessmen etc. are required to pay advance tax where the tax payable is Rs 10,000 or more.
 
Interest applicability and calculation
Here are the two situations in which interest is applicable -
Your tax liability for the financial year is more than Rs 10,000 and you did not pay any advance tax
You paid advance tax but advance tax paid is less than 90 per cent of 'assessed tax'
In any one of the cases interest under Section 234B shall be applicable.
 
Assessed tax = Your total tax liability less TDS less relief claimed under Section 90/91
less relief of tax claimed under Section 90A less tax credit under Section 115JAA/115JD
 
Interest is calculated at 1 per cent on the amount which is assessed tax minus advance tax.
 
Part of a month is rounded off to a full month. The amount on which interest is calculated is also rounded off in such a way that any fraction of a hundred is ignored.
Let's understand interest under Section 234B with examples.
 
Example 1
Sanjay is a freelancer has a total tax liability of Rs 55,000. Sanjay paid his tax liability at the time of filing his return on 12th June.
Since Sanjay's total tax liability is more than Rs 10,000, and he is liable to pay advance tax.
 
Here is the interest calculation
Rs. 55,000 x1% x 3 (April, May, June) = Rs 1,650
Sanjay is liable to pay Rs 1,650 interest as per Section 234B.
 
Example 2
Vinay had a total tax payable of Rs 56,000 out of which Rs 48,000 was paid by him on March 20 as advance tax. Remaining balance of Rs 8,000 was paid by Vinay while filing his return on May 31.
 
Even though Vinay has paid advance tax, it needs to be checked whether he paid 90 per cent of the assessed tax as advance tax or not.
Assessed tax in Vinay's case is Rs 56,000. 90 per cent of assessed tax is Rs 50,400. However, he only deposited Rs 48,000 which is less than 90 per cent of assessed tax. Therefore, Vinay is liable to pay interest under Section 234B.
 
Here is the interest calculation
56,000 (assessed tax) - Rs 48,000 (advance tax) = Rs 8,000
Rs 8,000 x1% x 2 (April & May) = Rs 160
Rs 160 is the interest payable by Vinay under Section 234B.
 
Example 3
Rajiv's total tax liability for the financial year is Rs 1,50,000. A TDS of Rs 1,35,627 was already deducted from Rajiv's income. Rajiv paid Rs 5,000 on March 25 and balance of Rs 9,373 at the time of filing her return on July 20.
Assessed tax = Rs 1,50,000 (total tax) minus Rs 1,35,627 (TDS) = Rs 14,373
 
Rajiv should have paid at least 90 per cent of the assessed tax or 90 per cent of Rs 14,373 which is Rs 12,935 before March 31. However, he only paid Rs 5,000. Therefore, he is liable to pay interest under Section 234B.
 
Rs 14,300 (assessed tax, fraction of 100 ignored) x 1% x 4 (April, May, June, July) = Rs 572
Rs 572 is the interest payable under Section 234B by Rajiv.
 
Advance tax is NOT applicable when: Effective assessment year 2011-12 or financial year 2010-11, a taxpayer who opts for the scheme of computing business income under Section 44AD on presumptive basis, income is estimated at 8 per cent of turnover. Such a taxpayer shall be exempted from payment of advance tax for such business.
 
Effective assessment year 2013-14 or financial year 2012-13, a senior citizen (resident individual who is 60 years or more) who does not have any income from business and profession is not liable to pay advance tax.
 
Do note that usually where interest is payable under Section 234B, interest under Section 234C may also be applicable.

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