NATURE OF PENALTY AND INTEREST UNDER TAXATION

This query is : Resolved

Suresh S. Tejwani (Querist)
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16 January 2025 WHAT IS PENALTY AND INTEREST DEFINITION? WHAT IS DIFFRENCE BETWEEN BOTH? AND WHAT IS NATURE OF BOTH? WITH DETAILED EXPLANATION AND EXAMPLE.

Dhirajlal Rambhia

Dhirajlal Rambhia (Expert)
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16 January 2025 Penalty is levied for somthing wrong you have done or what you should have done but could not do so and interest is charged to compensate for late payment etc.
Interest is charged to compensate for time value of money.
Interest is charged at the specified percentage and can not be fixed but penalty can be in absolute as well as in percentage terms..

Dhirajlal Rambhia

Dhirajlal Rambhia (Expert)
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16 January 2025 A penalty is a liability imposed for noncompliance with tax law. Revenue authorities can file penalties against taxpayers for "failure to file," "failure to pay," "substantial understatement," and so on.
Interest compensates the government for cost of money over time.

Penalty : If you did not follow the order of Govt or its department or your private owner, you may get penalty. It may be in money form or physical imprisonment. Physical jail penalty will be done if you do any illegal work.

Interest : If you took loan, you have to pay interest of taken loan. It is just rent of money.

Example

Penalty : You have to pay electricity bill of Rs. 5000. Your state govt. has made the rule. If you do not pay it on its maturity, you have to pay penalty of Rs. 100 per day, you went end of 2nd month from maturity, you will pay Rs. 5000 + penalty of two months which is Rs. 6000 = Total payable amount is Rs. 11,000
Interest : Sometime, you have pay interest of your outstanding bill of electricity.
If it is 2% per month
Then you have to pay interest on Rs. 11,000
= Rs. 440
Total payable amount to electricity department = RS. 11440

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