As per the Income Tax Act, 1961, individuals and businesses are required to pay their income tax liabilities on time. However, if a taxpayer fails to pay their tax liability by the due date, they may be liable to pay interest under section 234B of the Income Tax Act.
Interest under section 234B is levied when a taxpayer fails to pay at least 90% of their tax liability before the end of the financial year. The interest is calculated from the due date of filing the return until the actual date of filing the return. In simple terms, if a taxpayer does not pay at least 90% of their tax liability before the end of the financial year, they will be charged interest under section 234B.
The rate of interest for section 234B is 1% per month or part of a month for the period for which the tax remains unpaid. The interest is calculated on the tax liability after deducting any TDS, advance tax or self-assessment tax paid by the taxpayer.
Let's understand the calculation of interest under section 234B with the help of an example. Suppose a taxpayer has a tax liability of Rs.10,000 for the financial year 2021-22. The due date for filing the return for the financial year 2021-22 is 31st July 2022. The taxpayer has paid only Rs.6,000 as advance tax before the end of the financial year. Therefore, the taxpayer has not paid at least 90% of their tax liability before the due date.
Now, if the taxpayer files their return on 30th September 2022, they will be liable to pay interest under section 234B for two months (August and September). The interest will be calculated on the shortfall of tax liability i.e., Rs.10,000 - Rs.6,000 = Rs.4,000.
The interest rate for two months would be 2% (1% per month for two months) on Rs.4,000. Therefore, the interest amount payable by the taxpayer would be Rs.80 (Rs.4,000 x 2% x 2).
It is essential to note that interest under section 234B is calculated from the due date of filing the return until the actual date of filing the return. Therefore, the interest amount may increase if the taxpayer delays filing their return.
In conclusion, it is crucial for taxpayers to pay their tax liabilities on time to avoid any interest charges under section 234B. Taxpayers should plan their tax payments well in advance and ensure that they pay at least 90% of their tax liability before the end of the financial year to avoid any interest charges.
