Interest Imposed by the I-T Department – Section 234B

This is the second part in a 3-part series about Interest imposed by the Income Tax Department.

Part II: Section 234 B
(Interest for not Paying Advance Tax)

What is Advance Tax?
Advance tax is also called “Pay as you Earn” Tax, which means that you are liable to pay taxes on income generated, at the time such income is received and not at the end of the financial year.

So if your Advance Tax liability is Rs.10,000 or more in a financial year, you are liable to pay that tax in installments during the financial year, instead of making a lump sum payment at the end of the year.

Who needs to pay Advance Tax?
All assesses including salaried employees, self-employed professionals, businessmen etc. are required to pay Advance Tax.

In the case of salaried employees, advance tax is deducted in the form of TDS by the respective employers and no advance tax is payable as such. However if salaried employees have other sources of income besides their salaries they need to pay advance tax.

As an exception, senior citizens if they do not have any business income are not liable to pay Advance Tax (effective financial year 2012-13).

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Late Payment Interest
You need to pay at least 90% of your total advance tax liability before 31st March to avoid interest.The Income Tax department waives off interest if the outstanding tax amount is less than 10% of the total tax liability for the financial year.

The interest is set at 1% simple interest per month on 90% of your tax liability, calculated from 1st April till the time you pay the total outstanding tax amount.

Illustration

Assume that the total tax you need to pay for this financial year is Rs. 100,000. You paid this amount on 15th July, i.e. 4 months late.

Interest = 90,000 x 1% x 4 = Rs. 3600

This Rs. 3,600 is the interest, payable over and above your actual tax liability.

Click to go to Part III, penalties under Section 234C

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