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Interest U/s 234B for Default in Advance Tax payment:

Section 234B of the Income Tax Act imposes a penal interest in case of default in payment of advance tax. If the advance tax is not paid, interest under section 234B will be levied. Interest u/s 234B is levied in two cases:
  1. When even on being liable to pay Advance Tax, nothing is paid as Advance Tax; or
  2. Where Advance Tax paid is less then 90% of Assessed Tax
Every person whose total tax liability for an year is Rs. 10000 or more, shall pay his taxes in advance in the form of Advance Tax.
  • Interest @1% for a month or part of a month is to be levied for default in payment of Advance Tax on the unpaid amount of Advance Tax.
  • In case of short fall in advance tax payment interest @1% will be calculated on the amount by which advance tax is short paid. 
  • Calculation of the amount of advance tax not paid or short paid will done as explained below:

Assessed Tax

(Tax on total income for the year less TDS/TCS & any other relief in tax payment granted under any other section of income tax act)

Less Advance Tax paid (if any)XXXXX
Amount of unpaid/short paid Advance TaxXXXXX
  • The Assessed Tax for the purpose of calculation of unpaid/short paid advance tax is the amount of income tax on total income reduced by the Tax Deducted at Source(TDS)/TCS, other relief claimed under section 90/90A/91 and tax credit claimed under section 115JAA/115JD and advance tax paid (if any).
  • Interest u/s 234B is levied from 1st April of the Assessment Year till the amount of Advance Tax is paid as Self Assessment Tax and if no Self Assessment Tax is paid, till the final assessment made.
Other Important Points:
  • The amount of tax on which penal interest is to be calculated shall be rounded off to nearest multiple of Rs.100. For example if interest is to be calculated on Rs. 9894, interest will be calculated on Rs. 9900.
  • For calculation of interest any part of month shall be treated as whole month. For example if the delay in furnishing return is of 5 months and 10 days, interest will be calculated for 6 months.
How to avoid Interest u/s 234B?
  • Interest u/s 234B is levied on the unpaid/short paid amount of Advance tax. So if no default in advance tax or no short payment of advance tax no penal interest u/s 234B. We must make sure to deposit all due taxes on our other incomes like interest incomes well before 31st March of the financial year as advance tax.
  • Salaried people may avoid this interest by declaring their other incomes to their employers. Employer will deduct due tax on such incomes as TDS. As all taxes would already have been deducted there will be no default/short payment of advance tax.
Some examples to understand interest u/s 234B:

Lets take an example for the FY 2013-14(AY 2014-15), suppose tax on total income is Rs. 45900. TDS is Rs. 30000. Here Advance tax liability will be (45900-30000) Rs. 15900.
  • In this situation if advance tax of Rs. 15900 is not paid till 31st March 2014, there will be interest levied u/s 234B on Rs. 15900 till the same is paid as Self Assessment Tax.
  • If suppose Rs. 14000 are paid as advance tax till 31st March 2014, interest u/s 234B @ 1% will be levied on Rs. 1900 for short payment of advance tax till the same is paid as Self Assessment Tax.
  • In the same situation suppose the advance tax short paid of Rs. 15900 is paid as self assessment tax on 2nd April 2014 there will be interest levied @1% u/s 234B on Rs. 15900 for one month.
  • In the same stuation suppose TDS is Rs. 40900, means the due advance tax is Rs. 5000 only. There will be no interest levied u/s 234B as the advance tax liability is less then Rs. 10000.
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Some Quick links:
How to make online payment of advance tax?
Due Dates for Advance Tax payment
Calculation of Advance Tax
Interest u/s 234A for delay in filing return
Interest u/s 234C for default in payment of Advance Tax instalment
How to pay Self Assessment Tax

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