How to Calculate Interest Penalty Under Sections 234A, 234B & 234C


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.

Income Tax e-filing website

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.

Summary:

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.

Useful Links:

About the Author

Vijay PadiyarI'm a friendly guy with a witty sense of humor. I was born in Baroda, Gujarat and am currently settled in Bangalore, Karnataka. I'm a Leo by birth and certainly by character! So pick up any good book on zodiac signs, flip to the Leo section, and you'll know me rather well!View all posts by Vijay Padiyar →

16 Comments

  1. uttamuttam10-14-2012

    I want to know, I’d filed TDS returns on 2009 but received refund on 2012. so what is the interest rate IT deptt supposed to pay me?

  2. VishalVishal10-11-2012

    I am a salaried employee. Apart from salary I have some interest income from FD’s. I received this interest on 31st March 12 . Bank has already deducted TDS (10%) on this interest. Since I am in 30% tax bracket so I need to pay remaining tax on this income which I paid on 6/6/12 (around Rs 12,000/-) . Do I still come under 234 A/B/C?

    • Vijay PadiyarVijay Padiyar10-11-2012

      You will need to pay interest under 234C as you have not paid 100% taxes by March 15. I am not sure about 234B as I don’t know your full tax liability.

  3. pankajpankaj09-05-2012

    Hello ,

    I have one question about the pay Interest 234 A. I have already paid the balance tax but Interest 234 A is pending on my end to complete the IT return.

    could you please tell me how to pay the Interest 234 A amount through online.

    thank you

  4. santonusantonu07-29-2012

    thanks for beautiful information. after TDS deduction my outstanding tax is Rs.3920 which is only due to saving accounts interest. I am going to pay it through internet banking on 30/07/12 through 280 challan. Now sir tell me whether I have to pay interest under 234C as amount is less than 10,000.00

    • Vijay PadiyarVijay Padiyar07-30-2012

      Fill up the ITR sheet with all the information. Section 234A/B/C interest penalty will be automatically calculated. You can pay the same.

  5. NarayananNarayanan07-27-2012

    HI,

    I have a few clarifications from the above ………..my total income is 686000 and i have not paid any advance tax after deductions i have to pay tax 42000 . what would be fine?????

    • Vijay PadiyarVijay Padiyar07-27-2012

      Without knowing specific details, it would not be possible to calculate the fine. But all the calculations are provided here, so you can calculate yourself.

      • Sushil Kumar GoyalSushil Kumar Goyal08-08-2012

        Dear Mr. Vijay,

        I am Sushil Goyal from Chandigarh. A company is developing game in india for Apple Mobile and receiving the payment in USD. Is there any Income Tax Liability of this company?
        Please advise me on this matter.

        Regards,

        Sushil Goyal
        9876033459

        Company is generating income in india. I want to know notification if any, for income tax relief.

        • Vijay PadiyarVijay Padiyar08-08-2012

          I believe there would be a tax liability. But I am not a CA, and I would advise you to consult a CA.

  6. OjasOjas07-27-2012

    Thanks Vijay for an informative article. Do salaried individuals come under section 234C? I have some outstanding tax to be paid, and the excel sheet shows interest calculated as per both 234B and 234C. My understanding was that advanced tax is something that companies/businessmen pay! Also the excel sheet has no real information on TDS paid in each quarter, so it is dividing the total TDS into 30%, 60%, 100% brackets to calculate interest. This will result in incorrect calculation. What do you say? Do I need to pay interest as per 234C as well?

  7. BharatBharat07-03-2012

    Nice post.

    I have question on calculation of interest for 234c. I am a salaried individual. I had received some amount around 5 lakhs as winning prize of software competion around Feb last week. I paid around 1.5lakh as advance tax (as i fall in 30% tax bracket). Now when I file return, it shows some amount as interest under 234c when i use itr2 excel sheet from incometaxefiling website. I feel that is incorrect as I had no clue about this source of income untill feb last week and I did not pay 30%, 60% by sept , dec. Could you please help if the excel sheet is buggy or my understanding is incorrect.

    Regards
    Bharat

    • Vijay PadiyarVijay Padiyar07-03-2012

      Your point is right, you are not liable for paying advance tax. But unfortunately I will not be able to help with your problem as I have not used ITR-2. If you need professional help with your query, perhaps you can try our sponsor Tax Buddy. Their rates are extremely nominal.

Leave a Reply

Current day month ye@r *