As per the Indian Income Tax Act rules, tax on income must be paid periodically during the year, and not in a lumpsum form at the end of the year. Additionally, taxes due must be paid in full by the end of the year and not carried forward. Thirdly, income tax returns must be filed within the stipulated time period.
As a result, companies are required to pay tax periodically on presumptive (expected) income for the year. This is known as Advance Tax. Similarly, in case of salaried employees, tax is deducted from salary each month and deposited with the IT Dept. This is known as Tax Deducted at Source (TDS). Even banks have to deposit tax periodically on interest earned by clients through bank deposits or fixed deposits.
Under normal circumstances, if tax is deposited periodically, there is no need to pay any kind of penalties. However, it often happens that tax is not deposited in a timely manner, or the amount is inadequate as per the norms. This can happen for a variety of reasons:
- For companies, this can happen if less Advance Tax is deposited under assumption of weak income, but earnings pick up at the end of the year and final income far exceeds the expected income, resulting in a higher tax liability.
- For salaried employees, the most common reason is change of jobs during the year. Often, when people join a new company, they do not provide their previous company’s Form 16 to their current employer. As a result, the current company deducts tax only on the salary paid by it, ignoring your previous income. Thus, the net tax paid at the end of the year is less than the actual tax payable.
To deal with penalties for such cases, Sections 234A/B/C of the Income Tax Act are devised. These sections stipulate that a penalty must be paid in the form of simple interest in case of (a) delay in payment of tax, (b) insufficient payment of tax during a Financial Year, and/or (c) delay in filing return of income during an Assessment Year.
Additionally, Section 271F of the Income Tax Act stipulates that income tax returns must be filed by July 31st of the Assessment Year in case additional taxes are payable, or by March 31st in other cases. Failure to do so also may attact a separate penalty of Rs. 5,000 over and above the penalty calculated under Sections 234A/B/C or any other penalties.
I will now discuss Sections 234A/B/C in more detail, with emphasis on salaried taxpayers. For companies, the rules are slighly different, and you may refer to other sources for details.
1. Section 234A: Interest penalty for delay in filing income tax return
As per the Income Tax Act, if you have any outstanding tax payable at the end of a Financial Year (FY), you must pay the balance tax amount and file your income tax returns by July 31st of the corresponding Assessment Year (AY). If you file your returns after this date, then under Section 234A you are liable to pay 1% simple interest per month on the balance tax payable, applicable from the month of August of the AY till the month of filing returns.
So, for example, if you have outstanding tax payable of Rs. 10,000 and you file your tax returns on 15th December, you will have to pay interest penalty of 5% (1% p.m. x 5 months) on the balance tax amount of Rs. 10,000, i.e. Rs. 500.
NOTE: Section 234A penalty is not applicable if you don’t have any balance tax payable. In that case, you can file your returns anytime before the end of the relevant AY (i.e. March 31st).
2. Section 234B: Interest penalty for incomplete payment of tax
Section 234B stipulates that at least 90% of the total tax payable by you must have been paid by the end of the Financial Year (FY), i.e. March 31st. So if you have balance tax payable at the end of the FY, and the amount is more than 10% of your total tax liability, then under Section 234B you will attract a simple interest penalty of 1% per month on the balance tax amount, applicable from April 1 of the Assessment Year (AY).
For example, if you have an outstanding tax liability of Rs. 10,000 at the end of a FY and pay this amount on 15th July of the AY, you will have to pay a penalty of 4% (1% p.m. x 4 months) on top of it, i.e. Rs. 400.
NOTE: Section 234B penalty is not applicable if the outstanding tax liability is less than 10% of the total tax payable for the relevant FY.
3. Section 234C: Interest penalty for delay in periodic payment of tax
Section 234C mandates periodic payment of tax during the year, culminating in full payment of total tax due by the end of the Financial Year. As per this section:
- 30% of the total tax amount must be paid by September 15th of the FY
- 60% by December 15th, and
- 100% by March 15th of the FY
If there is a slippage in payment of tax, then you are liable to pay interest penalty under Section 234C as follows:
- If the tax paid by you by 15th September of the FY is less than 30% of total tax payable for the entire year, then under Section 234C you are liable to pay simple interest of 1% per month for 3 months (i.e. total 3%) on the shortfall below 30%.
- If tax paid by you by 15th December is less than 60% of total tax payable, again you need to pay 1% simple interest per month for 3 months on shortfall below 60%.
- If tax paid by you by 15th March of FY is less than 100% of total tax payable, simple interest of 1% on outstanding amount needs to be paid.
Note that these three penalties must be calculated separately and added to arrive at the total interest penalty under Section 234C.
So if your total tax liability for a given FY is Rs. 1,00,000, then at least Rs. 30,000 must be deposited by September 15th, Rs. 60,000 by December 15th and entire amount, i.e. Rs. 1,00,000, by March 15th.
Let’s say you deposited Rs. 20,000 on September 1st, another Rs. 20,000 on December 1st, Rs. 55,000 on March 1st and remaining Rs. 5,000 on March 20th. In that case:
- On September 15th, there is a tax shortfall of Rs. 10,000 (only Rs. 20,000 paid against minimum Rs. 30,000 payable)
- On December 15th, there is a tax shortfall of Rs. 20,000 (only Rs. 40,000 paid in total against minimum Rs. 60,000 payable)
- On March 15th, there is a tax shortfall of Rs. 5,000 (Rs. 95,000 paid in total against Rs. 1,00,000 payable)
For the first case, you need to pay 1% penalty on shortfall of Rs. 10,000 for 3 months, i.e. Rs. 300 in all.
For the second case, you need to pay 1% penalty on Rs. 20,000 for 3 months, i.e. Rs. 600 in all.
For the third case, you need to pay 1% penalty on Rs. 5,000, i.e. Rs. 50.
So total penalty is 300 + 600 + 50 = Rs. 950.
NOTE: Section 234C penalty does not apply to unexpected income during a FY, such as income from lottery winnings, races, game shows, or any income that could not have been possibly anticipated in advance. Such income must be excluded while calculating the percentage taxes payable.
What these sections essentially tell us is to pay our taxes periodically and on time, and to file our return of income within the stipulated time limit.
- Section 234A, 234B and 234C explained: http://www.simpletaxindia.net/2012/03/interest-section-234a-section-234b.html
- Online interest calculator for Sections 234A, 234B and 234C: https://finotax.com/income-tax/intt234-nc1617