Default in payment of tax attracts interest u/s 234A, B & C

Default in payment of tax attracts interest u/s 234A, B & C

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You must pay taxes. But there’s no law that says you gotta leave a tip- Morgan Stanley

Money saved is money earned. One such saving is possible if the tax payment is done timely by the taxpayer. Delay in payment of tax attracts interest. Notably, in the current scenario, rate of Interest on bank FDR & interest chargeable on loan availed from bank is comparatively cheaper as compared to the interest that can be charged by the Income Tax Department. It makes sense to pay the income tax well in time to avoid impact of interest.

One has to be careful while complying with the interest provision as a delay of just one day could attract the tax for 1 month or 3 months.

Under Income tax Act 1961, interests can be charged for various defaults. Most common & frequent among them for individual taxpayers is interest u/s 234A, 234B & 234C. Let us have a look at the provision for levy of Income Tax under the Income Tax Act-1961.

  1. Section 234A (Interest for defaults in furnishing return of income):

It is mandatory to file income tax returns within the due date. If there is a default in furnishing the return of income by the prescribed due date then interest is leviable @ 1% for every month or part of the month on the amount of tax payable. This interest is calculated from the due date to the date of actually filing the income tax return. The prescribed due date means the time limits mentioned under section 139(1) i.e. 31st July or 30th September as the case may be. However, no Interest u/s 234A is chargeable if final tax liability is Nil or where there is a refund due.

  1. Section 234B (Interest for defaults in payment of advance tax):

Interest u/s 234B is applicable if taxpayer is liable to pay advance tax & the tax deposited is less than 90% of the tax due. Default attracts interest @ 1% per month or part of the month. This interest is chargeable from 1st April till the date of filing income tax return. To avoid interest u/s 234B, Taxpayer must ensure that at least 90% of the tax liability is paid/ credited before 31st March.

No advance tax is required to paid (a) by senior citizen (not having any income from business or profession) or (b) where tax to be paid is less than Rs. 10,000/-.

  1. Section 234C (Interest for default in payment of installment of advance tax):

With the concept of ‘Pay as you earn’, taxpayer is required to the tax within the year in 4 quarterly installments as under:

  1. On or before 15th June-15%of the tax
  2. On or before 15th September-45%of the Tax
  3. On or before 15th December-75% of the tax
  4. On or before 15th March- 100% of the Tax

For delay in payment of installment of advance tax, Interest can be charged @ 1% p.m for 3 months for the first 3 quarters and for 1 month for the last quarter. No interest is chargeable for the first & second quarter if the advance tax payment is not less than 12% or 36% of the tax amount.

If the delay in payment of the advance tax is on account of Capital Gains, Winnings from lotteries, crossword puzzles, races (including horse races), card games and any other activity in the nature of gambling, betting etc. & if the tax in respect of such income is as part of subsequent remaining installments then no interest shall be leviable in respect of such shortfall.

The assessee who declares income u/s 44AD(1)/44ADA(1) should pay the entire tax (100%) as advance tax on or before 15th March.

  1. If short payment is because of retrospective amendment or because of subsequent court rulings, interest u /s 234B & 234C cannot be imposed – CIT vs. National Development Board (2017) 83 Taxmann 109 (Guj)
  2. If the return of income could not be filed for the reason that the books of accounts is in the custody of income tax department, no interest can be charged u/s 234A [Paras Patel Vs. B.M.Jindel (2004) 135 Taxmen 125 (Guj)].

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