How to calculate Interest under Section 234B of Income Tax Act, 1961?

Interest under Section 234B of Income Tax Act 1961

(1) Interest under section 234B is attracted for non-payment of advance tax or payment of advance tax of an amount less than 90% of assessed tax.

(2) The interest liability would be 1% per month or part of the month from 1st April following the financial year upto the date of determination of income under section 143(1) and where a regular assessment is made, upto the date of such regular assessment.

(3) Such interest is calculated on the amount of difference between the assessed tax and the advance tax paid.

(4) Assessed tax is the tax calculated on total income determined under section 143(1) and where a regular assessment is made, the tax on the total income determined under such regular assessment less

– tax deducted or collected at source.

– any relief of tax allowed under section 89

– any tax credit allowed to be set off in accordance with the provisions of section 115JD

(5) However, where self-assessment tax is paid by the assessee under section 140A or otherwise, interest shall be calculated upto the date of payment of such tax and reduced by the interest, if any, paid under section 140A towards the interest chargeable under this section. Thereafter, interest shall be calculated at 1% on the amount by which the tax so paid together with the advance tax paid falls short of the assessed tax.

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

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.

Section 234B

Period of Levy for 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 and application is made to 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 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.

Example

Mr. X is a businessman. His tax liability as determined under section 143(1) is Rs. 28,400. He has not paid any advance tax but there is a TDS credit of Rs. 10,000 in his account. He has paid the balance tax on 31st July i.e. at the time of filing the return of income. Will he be liable to pay interest under section 234B, if yes, then how much?

In this case, the tax liability (after allowing credit of TDS) of Mr. X comes to Rs. 18,400 (i.e. Rs. 28,400 – Rs. 10,000) which exceeds Rs. 10,000 and hence, he will be liable to pay advance tax. He has not paid any advance tax and hence, he will be liable to pay interest under section 234B. Interest under section 234B will be levied at 1% per month or part of the month. In this case, Mr. X has paid the outstanding tax on 31st July and hence, interest under section 234B will be levied for the period from 1st April to 31st July i.e. for 4 months.

Interest will be levied on unpaid tax liability of Rs. 18,400. Interest at 1% per month on Rs. 18,400 for 4 months will come to Rs. 736.