234C of Income Tax Act

The income tax department enables compliance by allowing advance tax payment in four installments, applying interest penalties under Section 234C for defaulters. Taxpayers with annual tax liability over Rs. 10,000 must pay promptly, incurring 1% monthly interest for delays.
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Calculation of Interest U/s 234c
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22-November-2024

The Income Tax Department enables taxpayers to pay advance tax in four instalments to simplify compliance. However, late payments attract interest penalties under Sections 234B and 234C. Advance tax is mandatory if the total tax liability exceeds Rs. 10,000 in a financial year. Section 234B imposes a 1% monthly interest on those who fail to pay at least 90% of their net tax liability, while Section 234C applies the same rate to delays in instalment payments.

If you are an Indian taxpayer, it is important to know if you are liable to pay advance tax and what consequences may follow if you fail to pay the amount before the due date. This article will help you understand everything about section 234C of the Income Tax Act and how it can make you liable to pay interest if you default on advance tax payments.

What is 234C of Income Tax Act?

Section 234C of the Income Tax Act, 1961, addresses the interest imposed on individuals and entities who fail to comply with advance tax payment requirements. Taxpayers whose total annual tax liability exceeds ₹10,000 are required to pay advance tax in four quarterly instalments throughout the financial year. The advance tax is meant to ensure that taxpayers meet their tax obligations in a timely manner, preventing a lump-sum payment at the end of the year.

If taxpayers default on these advance tax payments or underpay the required amount, they become liable to pay interest under Section 234C. Specifically, taxpayers who fail to pay the full advance tax amount must pay interest at a rate of 1% per month on the shortfall, calculated from the due date of each instalment until the payment is made. This interest is applied for each month or part of a month that the amount remains unpaid or underpaid. Therefore, Section 234C serves as a financial deterrent, encouraging timely payment of advance taxes and ensuring compliance with tax regulations in India.

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What is an Advance Tax?

Advance tax is a system where individuals and businesses pay taxes in instalments throughout the financial year, rather than waiting until the end. It applies to anyone whose tax liability exceeds ₹10,000 in a year. Payments are typically made quarterly, in June, September, December, and March, based on estimated income for the year. This helps the government maintain a steady cash flow and prevents taxpayers from facing a large lump sum at year-end. It is mandatory for salaried individuals, freelancers, and businesses unless their income is solely from salary, which already has tax deducted at source (TDS).

Due dates for paying advance tax

Advance tax payments are made in instalments throughout the financial year. Taxpayers must pay a certain percentage of their total tax liability by specified dates. However, taxpayers opting for presumptive taxation under sections 44AD or 44ADA have a single due date for payment.

Due date

Tax liability to be paid

For taxpayers opting for presumptive income (u/s 44AD or 44ADA)

15th June

15% of total tax

Not Applicable

15th September

45% of total tax (cumulative)

Not Applicable

15th December

75% of total tax (cumulative)

Not Applicable

15th March

100% of total tax

100% of total tax

 

Rate of Interest under Section 234C

Section 234C imposes interest on taxpayers who fail to pay advance tax instalments on time or do not pay the required amount. The interest is calculated at 1% per month or part of a month on the shortfall. It applies if less than 15%, 45%, 75%, or 100% of the tax liability is paid by the respective due dates. The interest is charged on the shortfall amount from the due date till the date of payment. However, relief is provided if the shortfall is due to capital gains or unforeseen income, provided the advance tax is paid promptly.

Also read about: What is direct tax code

When does interest on advance tax not accrue?

Interest on advance tax does not accrue under specific circumstances. Firstly, if a taxpayer's total tax liability is less than ₹10,000 in a financial year, they are not required to pay advance tax. Secondly, if the taxpayer pays the full amount of advance tax due by the specified due dates, no interest will be charged. Additionally, if a taxpayer qualifies for the option of self-assessment tax and pays the necessary amount within the stipulated time, interest under Section 234C will not apply. Lastly, the tax paid through TDS or TCS also contributes towards fulfilling advance tax obligations, preventing interest accrual.

How is interest charged under section 234C?

Whenever a taxpayer defaults or falls short of the advance tax payment, they are liable to pay interest on the defaulted or the remaining amount under section 234C. Under section 234C of the Income Tax Act, the interest is charged as follows:

Particulars Interest rate Interest period Amount on which interest is calculated
If the advance tax paid on or before June 15 is less than 15% of the amount 1% simple interest 3 months 15% of the amount - tax amount already deposited before June 15
If the advance tax paid on or before September 15 is less than 45% of the amount 1% simple interest 3 months 45% of the amount - tax amount already deposited before September 15
If the advance tax paid on or before December 15 is less than 75% of the amount 1% simple interest 3 months 75% of the amount - tax amount already deposited before December 15
If the advance tax paid on or before March 15 is less than 100% of the amount 1% simple interest - 100% of the amount - tax amount already deposited before March 15

 

Also read about: Difference Between Income Tax Act and Direct Tax Code

How to calculate the interest under section 234C?

You are liable to pay 1% interest if you have defaulted or partly paid the advance tax amount. The interest of 1% is calculated and paid if the paid advance tax is:

  1. Less than 15% of the total assessed tax on or before 15th June.
  2. Less than 45% of the total assessed tax on or before 15th September.
  3. Less than 75% of the total assessed tax on or before 15th December.
  4. Less than 100% of the total assessed tax on or before 15th March.

Note: Here, interest is calculated on the remaining amount after making adjustments for TDS/TCS amounts.

Examples of interest calculation under section 234C

There are numerous types of taxpayers who may choose to file taxes under various income tax sections. Hence, the interest charging structure under section 234C of the Income Tax Act may differ for taxpayers. Here are three cases to better understand the interest charging structure and the calculation of interest under section 234C of the Income Tax Act:

Case 1:

Calculation of interest when the taxpayer is not choosing to file taxes under the presumptive taxation scheme under section 44AD. Here, interest is calculated using the following formula: 1/100 x (amount of shortfall/number of months) x number of months.

Example:

Let's assume Ms. B, a non-presumptive taxpayer, has a total tax liability of Rs. 3,00,000. She is required to pay advance tax in four instalments. If she pays Rs. 60,000 in the first quarter, Rs. 40,000 in the second quarter, and none in the third quarter, the interest for the third quarter would be calculated as follows:

Interest = 1/100 (1,50,000/3) 3 = Rs. 1,500

Case 2:

Calculation of interest when the taxpayer is choosing to file taxes under the presumptive taxation scheme under section 44AD. Here, interest is calculated based on the difference between the advance tax and the 8% presumptive income:

Due date Taxpayers opting for presumptive income under section 44AD
On or before 15th June NIL
On or before 15th September NIL
On or before 15th December NIL
On or before 15th March Upto 100% advance tax payable

 

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Consequences of non-compliance with Section 234C

Failing to comply with Section 234C can result in significant interest charges and penalties. Taxpayers who either skip advance tax payments or pay less than the required amount are subject to interest under Section 234C, which can substantially increase their overall tax liability.

Additionally, penalties under Section 221 of the Income Tax Act may apply for non-payment or short payment of advance tax. These penalties are calculated at 1% per month or part thereof and continue until the outstanding tax is fully paid.

Applicability of provisions of section 234C of the Income Tax Act

Here is the applicability of section 234C of the Income Tax Act and the conditions when taxpayers are liable to pay 1% interest as a penalty:

  • If the advance tax amount on or before 15th June is less than 15% of the total amount.
  • If the advance tax amount on or before 15th September is less than 45% of the total amount.
  • If the advance tax amount on or before 15th December is less than 75% of the total amount.
  • If the advance tax amount on or before 15th March is less than 100% of the total amount.

Non-applicability of provisions of section 234C of the Income Tax Act

The provisions of section 234C of the Income Tax Act are not applicable if the short payment or non-payment of advance tax is the result of underestimating the following incomes:

  • Income earned because of lottery winnings, crossword puzzles, etc.
  • Income earned because of capital gains.
  • Income earned as revenue from a new venture.
  • Income more than Rs. 10,000 earned as dividend income from a domestic firm.

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Payment of advance tax not on time or interest for deferment of advance tax

If you have delayed your advance tax payments, you are liable to pay 1% interest as a penalty under section 234C of the Income Tax Act. Furthermore, interest on the non-payment or short payment of advance tax under section 234C is levied in case of deferment of various instalments of advance tax:

  • For taxpayers other than those choosing to file taxes using the presumptive taxation scheme under section 44AD or 44ADA, the interest of 1% will be levied as follows:
    • If the advance tax amount on or before 15th June is less than 15% of the total amount.
    • If the advance tax amount on or before 15th September is less than 45% of the total amount.
    • If the advance tax amount on or before 15th December is less than 75% of the total amount.
    • If the advance tax amount on or before 15th March is less than 100% of the total amount.
  • For taxpayers who have chosen to file taxes using the presumptive taxation scheme under section 44AD or 44ADA, the interest of 1% is levied based on the dates mentioned above up to the actual payment date.

Criteria under which advance tax interest is not payable

Interest on advance tax is not applicable in cases where the shortfall arises due to underestimating or failing to estimate income from capital gains or speculative sources, such as lottery or gambling winnings.

To qualify for this exemption, the taxpayer must ensure that the tax on such income is fully paid either:

  • Along with the remaining advance tax instalments, or
  • Before the end of the financial year, if no further instalments are due.

Calculation of interest for late payment

Here is a detailed table for understanding the calculation of interest for late payment of advance tax under section 234C of the Income Tax Act:

Payment due dates Assessed advance tax Actual advance tax paid Difference (cumulative) Penalty (cumulative)
15th June Rs. 20,000 Rs. 10,000 Rs. 10,000 @1% x 3 x 10,000 = Rs. 300
15th September Rs. 60,000 Rs. 30,000 Rs. 30,000 @1% x 3 x 30,000 = Rs. 900
15th December Rs. 90,000 Rs. 40,000 Rs. 50,000 @1% x 3 x 50,000 = Rs. 1,500
15th March Rs. 1,20,000 Rs. 60,000 Rs. 60,000 @1% x 1 x 60,000 = Rs. 600


In this example, the penalties are calculated based on the cumulative difference between the advance tax paid and the assessed advance tax at each due date. Interest is charged at 1% per month for the relevant period.

Exceptions to paying interest under Section 234C

You are not required to pay advance tax, and interest under Section 234C does not apply if you meet any of the following conditions:

  • You are a resident senior citizen with no income under the "Profits and Gains of Business or Profession" (PGBP) category.
  • Your net tax liability for the financial year is less than Rs. 10,000.

Difference between section 234B and section 234C of the Income Tax Act?

Both sections 234B and 234C deal with interest chargeable on the delays or defaults in paying advance tax. However, the interest charging structure differs for both sections. Here is a detailed comparison:

Section 234B:

  • Applicability: This section applies when a taxpayer has failed to pay advance tax or if the advance tax paid is less than 90% of the assessed tax.
  • Interest calculation: Interest is charged at 1% per month or part of a month from the 1st day of the assessment year until the date of actual tax payment.
  • Period: The interest is calculated from April 1 of the assessment year until the date on which the advance tax is paid.

Section 234C:

  • Applicability: This section applies when a taxpayer has not paid the prescribed percentage of advance tax by the due dates mentioned above.
  • Interest calculation: Interest is charged at 1% per month at the time of default of short payment in the same fiscal year.
  • Period: The due dates are June 15, September 15, December 15, and March 15.

Conclusion

Advance tax is mandatory for individuals and other eligible entities if the tax liability exceeds Rs. 10,000 in a fiscal year. The Indian government has created four quarterly windows to allow for the advance tax payment. However, if you fail to pay the advance tax amount or the amount deposited is short, you will be liable to pay interest on the remaining amount at 1% under section 234C of the Income Tax Act. Hence, it is important that you analyse your advance tax liabilities and ensure that you pay the advance tax amount fully and before the due dates.

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Frequently asked questions

How is interest under section 234C calculated?

Rate of Interest under Section 234CThe taxpayer is liable to pay simple interest at 1% per month or part of a month for the short payment or /non-payment of an individual's instalments of advance tax.

What is Section 234C of the Income Tax Act Act?
Section 234C of the Income Tax Act is a section that provides a provision for charging 1% simple interest on the amount defaulted or partly paid by a taxpayer for the advance tax liability during a fiscal year.

What is the proviso to section 234C?
The provision to section 234C of the Income Tax Act deals with charging 1% simple interest for a period of 3 months on the advance tax shortfall amount for the June, September, and December instalments and for 1 month for the March instalment.

What is the exemption u/s 234C?
Taxpayers who have a tax liability of less than Rs. 10,000 are not liable to pay any interest under section 234C as they don’t have to pay any advance tax. Furthermore, a resident senior citizen with no income under the ‘PGBP’ heading is also not liable to pay interest under section 234C of the Income Tax Act.

Is Section 234C applicable to senior citizens?
Senior citizens who are Indian residents and do not have any business income under the ‘PGBP’ heading are exempt under section 234C of the Income Tax Act.

What is the interest rate on advance tax u/s 234C?
The interest rate is 1% simple interest on the defaulted or remaining advance tax amount as per the predetermined advance tax instalments.

How can we avoid paying the penalty u/s 234C?
You can avoid the interest penalty under section 234C of the Income Tax Act by paying the liable advance tax on time within the quarterly instalments.

Why is section 234C applicable?
Section 234C of the Income Tax Act applies when an individual or an entity defaults or falls short on advance tax payments in a fiscal year.

What is the interest rate u/s 234C for senior citizens?
Senior citizens who do not have any business income under the ‘PGBP’ heading are exempt u/s 234C.

What is the difference between sections 234B and 234C?

Section 234B interest is imposed for the non-payment or underpayment of advance tax, while Section 234C interest is charged for the deferred payment of advance tax installments. These provisions are aimed at ensuring timely and adequate payment of advance tax to avoid any penalties or additional interest liabilities. Understanding these sections is crucial for taxpayers to fulfill their tax obligations and avoid financial repercussions.

When is interest charged under Section 234C?

Interest under Section 234C is charged when a taxpayer fails to pay the required percentage of advance tax by the due dates. If less than 15%, 45%, 75%, or 100% of the tax liability is paid on time, a 1% monthly interest is imposed.

Who is liable to pay interest under Section 234C?

Any taxpayer, including individuals, businesses, and professionals, is liable to pay interest under Section 234C if they do not pay the required advance tax instalments on time, except those opting for presumptive income under Sections 44AD or 44ADA, provided they pay by 15th March.

Can I avoid interest under Section 234C?

Yes, interest can be avoided if the shortfall in advance tax is due to capital gains or unexpected income, provided the advance tax on such income is paid by the next instalment date. Presumptive income taxpayers are also exempt if they pay 100% by 15th March.

What are the instalment dates for advance tax payments?

The instalment dates for advance tax payments are 15th June (15%), 15th September (45%), 15th December (75%), and 15th March (100%). Taxpayers under the presumptive income scheme are required to pay the entire advance tax by 15th March.

What happens if I fail to pay the required amount of advance tax?

If the required advance tax instalments are not paid on time, the taxpayer is liable to pay interest under Section 234C at 1% per month on the shortfall, calculated from the due date of the instalment until the payment is made.

Are there different interest rates for different instalment periods under Section 234C?

No, the interest rate under Section 234C remains constant at 1% per month or part of a month. This rate is applied uniformly across all instalment periods if there is a shortfall in advance tax payments by the respective due dates.

Can interest under Section 234C be waived or reduced?

Interest under Section 234C cannot generally be waived or reduced, except in cases where the shortfall arises from capital gains, winnings, or unexpected income. If the advance tax on such income is paid by the next instalment date, the interest may not be applicable.

What happens if I pay the entire assessed tax before the last instalment date?

If the entire assessed tax is paid before the last instalment date (15th March), no interest under Section 234C will be charged, as long as the taxpayer has met the advance tax requirements for the previous instalments as well.

Is interest under Section 234C a penalty or a tax?

Interest under Section 234C is not a penalty but a compensatory interest charged for the delay in paying advance tax. It serves to compensate the government for the late payment of tax instalments and encourages timely tax compliance.

Can I revise my advance tax payments if I make an error?

Yes, taxpayers can revise their advance tax payments if they make an error in estimation. The shortfall or excess can be adjusted in the subsequent instalments, ensuring the total advance tax liability is paid by 15th March to avoid interest charges.

Are there exceptions to the applicability of Section 234C?

Exceptions to Section 234C include cases where shortfalls are due to capital gains or lottery income, provided advance tax is paid by the next due date. Additionally, taxpayers under presumptive taxation schemes are only required to pay by 15th March.

Can I appeal against the interest charged under Section 234C?

Interest under Section 234C is a statutory levy, and generally, there is no provision for appeal against it. However, in rare cases where the interest is incorrectly computed or applied, the taxpayer may approach the assessing officer for rectification.

What happens if I don't pay any advance tax throughout the year?

If no advance tax is paid throughout the year and the tax liability exceeds Rs. 10,000, the taxpayer will be charged interest under Sections 234B and 234C, along with possible penalties. Paying the tax in full by 31st March may reduce some interest charges.

Is 234B and 234C applicable to 44AD?

Yes, Sections 234B and 234C of the Income Tax Act are applicable to taxpayers under Section 44AD. These sections govern the interest levied for defaulting on advance tax payments. Even if a taxpayer opts for the presumptive taxation scheme under Section 44AD, they are still required to comply with advance tax payment provisions, making them subject to interest penalties for any defaults.

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