Section 234C of Income Tax Act: Interest Rate & Deferral Rules for Advance Tax Payments

Last Updated : March 10, 2023, 6:43 p.m.

It is the responsibility of every Indian citizen to pay income tax and file income tax returns in India. It is an excellent practice to keep, and it also helps in the TDS payment recovery. Your taxes give the government a significant amount of the revenue it needs to fund infrastructure and public programmes and services. The Income Tax Department works to make citizens’ participation with advance tax payments as simple and convenient as possible. One can choose to pay it in four instalments throughout the financial year. The taxpayer is subject to a penalty charge under Section 234C if they fail to pay the advance tax following the planned instalments.

What is Section 234C of Income Tax Act?

Section 234C of the Income Tax Act establishes the rate of interest and the circumstances for deferring advance tax payments. Everyone, including salaried taxpayers, must pay advance tax every quarter of the fiscal year. If you haven’t made your advance tax instalments on time, you must pay the penalty as described in section 234C of the Income Tax Act. Interest is imposed under Section 234C in the following circumstances when different instalments of advance tax are deferred:

1. Interest must be charged for taxpayers who have not selected the current taxation scheme under Section 44AD or Section 44ADA:

• If the sum of advance income tax paid by June 15 or earlier equals less than 12% of the tax amount payable on the returned income.
• If the advance tax payment amount is less than 36% of the tax amount payable on the returned income as of September 15 or earlier.
• If the amount paid in advance by the deadline of December 15 is less than 75% of the tax payable on the income that was returned.
• If the amount of the advance tax paid by the deadline of March 15 is less than 100% of the entire tax payable on the income that was returned.

1. Interest will be levied on taxpayers who choose the presumptive taxation plan that falls under Section 44AD or Section 44ADA if the advance tax payment made on or before the 15th of March is less than 100% of the due tax on the returned income.

What is Advance Tax?

Advance tax is a sort of tax that is paid in instalments for the fiscal year, depending on the estimated income. According to existing regulations, taxpayers are only required to pay advance tax when their income tax liability, calculated based on their anticipated earnings for the fiscal year, surpasses Rs. 10,000 after the deduction of TDS for the relevant financial year. The advance tax guarantees that taxpayers pay their taxes on time and avoid paying a lump at the end of the fiscal year.

Who is Liable to Pay Advance Tax?

Every individual whose total tax liability is more than Rs. 10,000 after deduction of TDS/ TCS is liable for payment of advance tax. The following are liable to advance tax in India:

• Companies
• Partnership firms
• Association of Persons (AOP)
• Body of Individuals (BOI)
• Salaried employees
• Self-employed professionals/ businesses
• Taxpayers opting for presumptive tax schemes

When paying advance tax, regular taxpayers and those who use the presumptive taxation plan have distinct deadlines.

However, a senior citizen of India with no income falling under the “Income from Business and Profession” category is exempted from paying advance tax. A senior citizen in India is any individual older than 60 years old.

Difference between Section 234A, 234B and 234C

There is a significant difference between Sections 234A, 234B and 234C of the Income Tax Act.

Section 234A

Interest is imposed under Section 234A for failure to file an income tax return on time. On the unpaid tax amount, interest is levied at a rate of 1% per month or part of the month. The required interest needs to be paid as simple interest. The taxpayer must pay a simple interest of 1% per month or part of a month for any delay in filing their tax return.

Section 234A interest generates from the day immediately following the due date of submitting the income tax return and ends on the date of delivering the return of income. In circumstances where no return has already been filed, interest begins to charge until the assessment has been completed under Section 144.

Suppose an income tax return is not filed on time. In that case, interest must be paid on the tax amount on the total income estimated following subsection (1) of section 143, and in the event of a regular assessment, on the tax amount on the total income calculated under a regular assessment, as reduced by the amount of:

a) Any advance tax that was paid.

b) Any tax withheld or gathered at the source.

c) Any permitted tax relief.

Section 234B

Interest is applicable under section 234B of the Income Tax Act in two circumstances:

1) when the taxpayer has been unable to pay the advance tax that he is required to complete if his projected tax liability for the year is Rs. 10,000 or more, or

2) when the advance tax paid by the individual is below 90% of the assessed tax, which is the amount of income tax established under section 143(1) and the tax on the total income established under such regular assessment where regular assessment is made.

Interest is assessed under Section 234B for failure to pay advance tax. Interest is charged at a rate of 1% each month or a part of the month. The required interest to be paid is simple interest. For failing to pay advance tax, the taxpayer is responsible for paying simple interest at a rate of 1% per month or a portion of a month.

Interest under section 234B is assessed beginning with the first day of the assessment year (often on April 1) and continuing until the date on which section 143(1) income is determined or when a regular assessment is conducted. If the income is increased due to the assessment or re-computation, interest is charged on the difference between the income before the assessment year and the income after the assessment or re-computation.

The taxpayer has to pay the following interest on the amount:

• If the taxpayer for short of making an advance tax payment, the amount due will be equivalent to the assessed tax or,
• If the advance tax payable by the taxpayer is below 90% of the assessed tax, the amount on which the advance tax is paid as stated falls short of the assessed tax.

Section 234C

The Income Tax Act’s Section 234C summarises the circumstances and interest rate if you delay making advance tax payments. Everyone, including salaried taxpayers, is expected to pay advance tax every quarter of the fiscal year. If you haven’t made your advance tax instalments on time, you must pay the penalty as described in section 234C of the Income Tax Act.

Interest is assessed under section 234C at 1% per month or part of a month for failure to pay advance tax instalments on time. If an individual’s advance tax instalments are not paid in whole or are paid late, the taxpayer is responsible for paying a simple interest charge of 1% per month or part of the month.

If the last instalment is not paid in whole, interest under section 234C is assessed for one month and three months if the first, second, and third instalments are not paid in full.

Conclusion

Taxpayers need to understand Section 234C of the Income Tax Act and pay their Advance tax on time to avoid the penalty. In case of difficulties, the taxpayer should approach the concerned authorities for guidance and a penalty waiver. Section 234C is designed to ensure that taxpayers pay their taxes on time and contribute to the growth and stability of the Indian economy.