Section 234C: Interest on Deferred Payment of Advance Tax

Concept of Section 234C

As discussed the income tax department expects that the taxpayer should pay all the advance tax according to the schedule of the installments. The scheduled four installments are once in every quarter of the financial year. If in any case the taxpayer delays the payment of advance tax, the income tax department impose penal interest in the form of penalty under Section 234C.

Meaning of Advance Tax

Advance tax is the amount of tax that is paid in advance and not at the end of the financial year. This tax is calculated on the expected income in the financial year. The advance tax is only applicable in case if income tax liability exceeds Rs. 10,000 after the deduction of tax deduction at source (TDS) for the financial year.

How is interest charged under Section 234C?

When the taxpayer delays the payment of an installment fixed by the income tax department, he or she is imposed an interest under section 234C. The interest under this section is charged according to the scheduled installments.

Calculation of interest under Section 234C

1. Case 1

• If the amount of advance tax is less than 15% of the amount paid on or before 15th June.
  1. The rate of interest will be charged @ 1% per month for three months.
  2. The amount on which interest is calculated is 15% of the amount less tax already paid before the dates.
• If the amount of advance tax is less than 45% of the amount paid on or before 15th September.
  1. The rate of interest will be charged @ 1% per month for three months.
  2. The amount on which interest is calculated is 45% of the amount less tax already paid before the dates.
• If the amount of advance tax is less than 75% of the amount paid on or before 15th December.
  1. The rate of interest will be charged @ 1% per month for three months.
  2. The amount on which interest is calculated is 75% of the amount less tax already paid before the dates.
• If the amount of advance tax is less than 100% of the amount paid on or before 15th March.
  1. The rate of interest will be charged @ 1% per month for three months.
  2. The amount on which interest is calculated is 100% of the amount less tax already paid before the dates.

Example

If in case the total tax to be paid by Mr. X is Rs. 10,00,000. This tax is to be paid in four installments. The calculation of interest to be charged for delay will be calculated as follows: Note: Assumption is there is no tax deduction at source (TDS)

2. Case 2

* The amount on which tax is calculated is tax on total income less tax deduction at source(TDS) less relief under section 90 or 91 less tax credit under section 115JD.
* If there is a shortfall of payment of advance tax due to wrong calculation or failure to estimate the amount of capital gains or speculative income such as gambling or lottery or so on, no interest is payable.

Conclusion

For default in deferred payment of advance tax in installments fixed by the income tax department the taxpayer is charged a penalty in the form of interest under Section 234C. The department scheduled a proper time duration and the percentage of amount to be paid till that date. If you fail to pay that amount of advance tax on the due dates you will be charged interest @1% per month on the amount that is left to be paid.