Advance Tax: Interest Rates and Penalty Guidelines.

As per Section 208 of the Income Tax Act, of 1961, all taxpayers must pay advance taxes. It is applicable for individuals with minimum projected tax liabilities of ₹10,000, after TDS, from the previous year. 

 

Taxpayers can pay this tax in four installments, the due date for which is the 15th of the last month of the quarter. If you fail to pay on time, you will have to pay advance tax interest as stipulated in the I-T Act. 

Here are the details about advance tax interest on late or default payments under sections 234B and 234C: 

1. Section 234B

The advance tax penalties under this section are applicable in the following scenarios:

• When the taxpayer fails to pay the advance tax against their liability

• When the taxpayer has paid less than 90% of the total assessed advance tax amount

 

In this case, a simple interest of 1% applies as a penalty per month or for part of the month on default in payment. 

2. Section 234C

The advance tax interest under this section is applicable if:

• Taxpayers pay less than 12%, 36%, 75%, and 100% of their liability at the end of each quarter

• Taxpayers, under the presumptive tax scheme, pay less than 100% of their liability on or before March 15th 

 

Under these circumstances, the penalty will be a simple interest of 1% per month or part of the month.  

Here are a few instances to help you understand how to calculate advance tax interest in case of late payment:  

1. Under Section 234B

Imagine you have an advance tax liability of ₹12,000, which you do not pay before March 15th. In this case, your interest penalty u/s 234B will be 1% per month or for part of the month. 

 

The interest rate will be applicable until you pay the tax liability. So, if you paid the advance tax in July, the total amount that you must pay as a penalty will amount to 

 

SI= P X R X T 

= ₹12,000 X 1% X 4 (i.e. April, May, June, and July) 

= ₹480

2. Under Section 234C

Suppose your total tax liability is ₹45,500, which makes you liable for advance tax payments. Given this, you pay ₹8,000, ₹11,000, ₹12,000, and ₹14,500 every quarter. As per Section 234C, your interest penalty will be: 

In the above example, the shortfall of ₹3,125 is rounded off to ₹3,100 as per Rule 119A. 

 

If you had failed to pay 12% or 36% in the respective quarter, the penalty amount would be calculated as per the slab limit. This means it will be based on 15% and 45% and not 12% and 36%. Any tax that you pay before 31st March is treated as advance. So, ensure that you pay your liabilities on time and avoid hefty penalties. 

 

To pay the advance tax, all you have to do is fill in Challan 280 and pay through net banking or any other accepted mode. You can also use the income tax calculator available on the Income Tax Department’s website to evaluate your liabilities. Doing so will help ensure that you do not fall short in any quarter and can avoid the advance tax penalties.