Interest levied under Income Tax Act

Interest is levied under Income Tax Act, 1961 under section 234A, 234B and 234C. Let us discuss them in detail.

Section 234A- Interest for delay in filing the return of income

Under section 234A, interest is levied for delay in filing the return of income, filing of an updated return or filing of a return in response to notice issued under section 142(1). In other words, if the taxpayer files the return of income after the due date specified in this regard or files an updated return, interest under section 234A will be levied.

Rate of interest -Interest under section 234A is levied for delay in filing the return of income. Interest is levied at 1% per month or part of a month. The nature of interest is simple interest. In other words, the taxpayer is liable to pay simple interest at 1% per month or part of a month for delay in filing the return of income.

Period of levy of interest under section 234A - Interest under section 234A is levied from the period commencing on the date immediately following the due date of filing the return of income and ending on the date of furnishing the return of income, or in case where no return has been furnished, on the date of completion of the assessment under section 144. It should be noted that while computing the period of levy of interest, part i.e. fraction of a month is considered as full month.

Section 234B - Interest for default in payment of advance tax

 Section 234B provides for levy of interest for default in payment of advance tax. Interest under section 234B is levied in following two cases:

1. When the taxpayer has failed to pay advance tax though he is liable to pay advance tax; or
2. Where the advance tax paid by the taxpayer is less than 90% of the assessed tax (meaning of assessed tax is discussed later).

As per Section 208 of the Act, advance tax shall be payable by the taxpayer during the financial year if estimated tax liability of assessee during that year is ten thousand rupees or more.

Rate of interest - Under section 234B, interest for default in payment of advance tax is levied at 1% per month or part of a month. The nature of interest is simple interest. In other words, the taxpayer is liable to pay simple interest at 1% per month or part of a month for default in payment of advance tax.

Amount liable for interest- Interest under section 234B is levied on the amount of unpaid advance tax. If there is a shortfall in payment of advance tax, then interest is levied on the amount by which advance tax is short paid. The amount of unpaid/short paid advance tax is computed as follows :

(*) Assessed tax means the amount of tax as determined under section 143(1) and where regular assessment is made, the tax on total income as determined under such regular assessment as reduced by tax deducted/collected at source, relief/deduction of tax claimed under various sections like sections 89/90/90A/91 and tax credit claimed under section 115JAA/115JD.

Tax on total income determined under section 143(1) shall not include the additional income-tax, if any, payable under section 140B or section 143 and tax on total income determined under regular assessment shall not include the additional income-tax payable under section 140B.

Period of levy of interest- Interest under section 234B is levied from the first day of the assessment year, i.e., from 1st April till the date of determination of income under section 143(1) or when a regular assessment is made, then till the date of such a regular assessment.

In a case where the income is increased on account of assessment/re-computation, interest under section 234B will be levied on the differential amount from the first day of the assessment year till the date of assessment/re-computation. In a case where an application is made to the Settlement Commission, interest under section 234B will be levied on the differential amount from the first day of the assessment year till the date of making the application. Further, if the income as declared in the application is increased by the Settlement Commission, interest under section 234B will be levied on the differential amount from the first day of the assessment year till the date of such order. If as a result of the rectification order of the Settlement Commission, income is increased/decreased, interest will also be increased/decreased accordingly. If the taxpayer has paid any tax before completion of assessment, then interest will be levied as follows:

(a) Upto the date of payment of self-assessment tax, interest will be computed on the amount of unpaid advance tax.

(b) From the date of payment of self-assessment tax, interest will be levied on the unpaid amount of advance tax after deducting the self-assessment tax paid by the taxpayer.

Section 234C - Interest for default in payment of installment(s) of advance tax

Section 234C provides for levy of interest for default in payment of installment(s) of advance tax. Before getting into the detailed provisions of section 234C, let’s recall the provisions relating to payment of advance tax by a taxpayer.

As per section 208, every person whose estimated tax liability for the year exceeds Rs. 10,000, shall pay his tax in advance in the form of “advance tax” by following dates:

Any tax paid till 31st March will be treated as advance tax.

Interest under section 234C is levied, if advance tax paid in any installment(s) is less than the required amount. In other words, interest under section 234C in case of deferment of different installments of advance tax is levied in the following cases:

(A) In case of taxpayers (other than those who opted for presumptive taxation scheme under section 44AD or section 44ADA), interest shall be levied-

• If advance tax paid on or before 15th June is less than 12% of advance tax payable
• If advance tax paid on or before 15th September is less than 36% of advance tax payable
• If advance tax paid on or before 15th December is less than 75% of advance tax payable
• If advance tax paid on or before 15th March is less than 100% of advance tax payable

(B) In case of taxpayers who opted for the presumptive taxation scheme of Section 44AD or section 44ADA interest shall be levied if the advance tax paid on or before 15th March is less than 100% of advance tax payable.

No levy of interest if shortfall in payment of advance tax is due to capital gains or winning from lottery, etc. - Interest under section 234C is not levied, if, the shortfall in payment of advance tax is due to failure to estimate the amount of capital gains or income referred to in section 2(24)(ix) (i.e. winning from lotteries, crossword puzzle, etc.) or income from a new business or income referred to in section 115BBDA (i.e., dividend received from a domestic company exceeds Rs. 10,00,000) and the taxpayer pays the required advance tax on such income as a part of immediate following installments or till 31st March, if no installment is pending.

• Rate of interest- Interest under section 234C for default in payment of installment(s) of advance tax is charged at 1% per month or part of a month. The nature of interest is simple interest. In other words, the taxpayer is liable to pay simple interest @1% per month or part of a month for short payment/ non-payment of individual installment(s) of advance tax.
• Period of levy of interest- Interest under section 234C is levied for a period of 3 months, in case of shortfall in payment of 1st, 2nd and 3rd installment and for 1 month, in case of shortfall in payment of last installment.
• Amount liable for interest- Interest under section 234C is levied on the short paid amount of installment(s) of advance tax.