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Interest under Income Tax – A brief Discussion

March 13, 2024

Part F of Chapter XVII of the Income Tax Act, 1961 (‘Act’ for short) provides for charging interest and fee in the following cases-

Interest-

Section 234A – interest for defaults in furnishing return of income;
Section 234B – interest for defaults in payment of advance tax;
Section 234C – interest for deferment of advance tax;
Section 234D – interest on excess refund.

Interest under Section 234A

Interest under section 234A is levied for delay in filing the return of income. If the taxpayer files the return of income after the due date specified in this regard or files an updated return, interest under section 234A will be levied. Interest is levied at 1% per month or part of a month. While computing the period of levy of interest, part i.e. fraction of a month is considered as full month. The nature of interest is simple interest. The taxpayer is liable to pay simple interest at 1% per month or part of a month for delay in filing the return of income. Interest under this section is levied from the period commencing on the date immediately following the due date of filing the return of income and ending on the date of furnishing the return of income. In case no return has been furnished the interest will be calculated from the due date of filing the return to the date of completion of the assessment under section 144. Interest under this section is levied on the amount of tax as determined under section 143(1) and where regular assessment is made, the tax on total income as determined under such regular assessment as reduced by advance tax, tax deducted/collected at source, relief claimed under various sections like sections 89/ 90/ 90A/ 91 and tax credit claimed under section 115JAA/115JD.

Interest under Section 234B

Section 234B provides that interest is leviable when advance tax is not payable not in time. Advance tax shall be payable by the taxpayer during the financial year if estimated tax liability of assessee during that year is Rs.10000/- or more. Advance tax is payable for every quarter – 15^th June, 15^th September, 15^th December and 15^th March. Any tax paid till 31st March will be treated as advance tax.

Interest under section 234B is levied in following two cases-

When the taxpayer has failed to pay advance tax; or
Where the advance tax paid by the taxpayer is less than 90% of the assessed tax.

Interest for default in payment of advance tax is levied at 1% per month or part of a month. The nature of interest is simple interest. Interest under this section 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. The amount of unpaid/short paid advance tax is computed as follows-

Assessed tax: xxx xxx

Less Advance tax paid, if any : xxx xxx

Amount of unpaid advance tax : xxx xxx

Interest under this section is levied from the first day of the assessment year, i.e., from 1^st 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. Where the income is increased on account of assessment/re-computation, interest under this section will be levied on the differential amount from the 1^st day of the assessment year till the date of assessment/re-computation. If an application is made to Settlement Commission, interest under this section will be levied on the differential amount from the 1^st day of the assessment year till the date of making the application. If the Settlement Commission increased the income interest under this section will be levied on the differential amount from the 1^st day of the assessment year till the date of such order.

If the taxpayer has paid any tax before completion of assessment, then interest will be levied as follows-

Up to the date of payment of self assessment tax, interest will be computed on the amount of unpaid advance tax.
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.

Interest under Section 234C

Section 234C of the Act provides for the levy of interest for default in payment of installments of advance tax. The advance tax is payable every quarter in the prescribed percentage. The due date for the payment of advance tax is as detailed below-

Taxpayers (other than those who opted for presumptive taxation scheme of section 44AD or section 44ADA)-

By 15th June – Up to 15% of advance tax;
By 15th September – Up to 45% of advance tax;
By 15th December – Up to 75% of advance tax;
By 15th March – Up to 100% of advance tax.

Taxpayers who opted for presumptive taxation scheme of section 44AD or section 44ADA –

By 15th March – Up to 100% of advance tax.

Interest under this case in case of deferment of different installments of advance tax is levied in following cases-

If advance tax paid on or before 15^th June is less than 12% of advance tax payable;
If advance tax paid on or before 15^th September is less than 36% of advance tax payable;
If advance tax paid on or before 15^th December is less than 75% of advance tax payable;
If advance tax paid on or before 15th March is less than 100% of advance tax payable.

Interest under this section is not levied, if, the shortfall in payment of advance tax is due to failure to estimate-

the amount of capital gains or income referred to in section 2(24)(ix) (i.e. winning from lotteries, crossword puzzle, etc.) or income from a new business; or
income referred to in section 115BBDA (i.e., dividend received from a domestic company exceeds Rs. 10,00,000); and
the taxpayer pays the required advance tax on such income as a part of immediate following installments or till 31^st March, if no installment is pending.

Interest under this section for default in payment of installment(s) of advance tax is charged at 1% per month or part of a month. The nature of interest is simple interest. Interest under this section is levied for a period of 3 months, in case of short fall in payment of 1^st , 2^nd and 3^rd installment and for 1 month, in case of short fall in payment of last installment.

Interest under Section 234D

Section 234D (1) of the Act provides that where any refund is granted to the assessee under of section 143 (1), and-

no refund is due on regular assessment; or
the amount refunded under section 143(1) exceeds the amount refundable on regular assessment,

the assessee shall be liable to pay simple interest at the rate of 1.5% on the whole or the excess amount so refunded, for every month or part of a month comprised in the period from the date of grant of refund to the date of such regular assessment.

Section 234D (2) of the Act provides that where as a result of an order under-

section 154 – Rectification of mistake; or
section 155 – Other amendments; or
section 250 – Appeal; or
section 254 – order of Appellate Tribunal; or
section 260 – Appeal to High Court; or
section 262 – Appeal to Supreme Court; or
section 263 – Revision orders prejudicial to Revenue; or
section 264 – Revision of other orders; or
an order of the Settlement Commission under sub-section (4) of section 245D,

the amount of refund granted under section 143(1) is held to be correctly allowed, either in whole or in part, as the case may be, then, the interest chargeable, if any, under sub-section (1) shall be reduced accordingly.

Reference:

https://incometaxindia.gov.in/tutorials/6-interest%20payable%20by%20the%20taxpayer.pdf.