234A of Income Tax Act: Interest rates and calculation

Filing tax returns for income and paying taxes is the duty of every Indian resident. Income tax rules specify that an individual who makes a specific amount as income per year must pay income tax. The government would incur heavy charges if an individual did not pay the tax or file the ITR. Following sections 234A, 234B, and 234C of the Income Tax Act, this penalty is assessed as interest.

Scenarios when Section 234A applies

Every taxpayer must submit revenue tax returns for a fiscal year within the deadline specified each year. This interest will be charged if you fail to file a return within the required window or fail to file. Interest under section 234A will be assessed if the taxpayer submits their income tax return after the deadline established by the department.

Section 234A of Income Tax Act: Details

The Income Tax Department expects that assessees will submit their income-tax returns within the deadlines specified in the notification. The assessee will be responsible for paying simple interest at a rate of 1% each month if filing returns under any of the sections mentioned above is delayed. The time frame of the delay will be computed starting on the day just after the deadline. Following section 234A of the Income Tax Act, this interest is assessed.

When the return of income for any assessment year is required under the;

• subsection (1)
• sub-section (4) of section 139,
• sub-section (1) of section 142 needs to be furnished or provided after the due date.

Now, if you fail to file your taxes or miss the deadline, you may find yourself in one of these three situations:

• You must pay taxes to the IT department.
• The I-T department will reimburse your taxes if you qualify.
• Your taxes were delivered on time, and no further taxes owing or refunds are anticipated.

A portion of the month will be treated as a whole month when calculating interest.

How to calculate interest under Section 234A?

Assume Goutham has Rs. 2,00,000 in total, which includes his net advance tax and TDS. He now submits his tax returns on April 16, 2022, rather than October 25, 2021. He is, therefore, six months late. Thus, his interest will be:

2,00,000 X 1% X 5 = Rs.10,000

He will now pay an extra 10,000 rupees. A 1% monthly interest charge will be levied if he no longer pays his obligations.

In addition to 234A, the following interest and fees are covered by section 234:

• Section 234B: Delayed payment of Advance Tax
• Advance Tax-Deferred Payment – Section 234C
• ITR filing late fee – Section 234F

Section 234A of Income Tax Act: Interest span

From the day after the income tax filing deadline until the day the return is provided, section 234A interest is owed.

The amount of tax on which interest is assessed is determined after subtracting taxes withheld at the source and already paid in advance.

The amount used to compute interest is established per section 143 or using regular assessment-determined income. However, taxes already paid in advance, TCS, TDS, and any applicable reliefs must be subtracted from the total.

Section 234A of Income Tax Act: Interest rates

Section 234A assesses penalties for submitting an income tax return untimely. Interest is estimated at a rate of one per cent (1%), or a portion thereof, per month on the nonpayment balance. The type of income that payers are required to pay is a simple rate. The taxpayer owes a simple interest cost of 1% for each full or partial month that their tax return is overdue.

Section 234A of Income Tax Act: Duration of interest levy

Interest under Section 234A accrues beginning on the day after the income tax return is due and ends on the day the return of income is furnished. Interest is accumulated until the completion of the evaluation per Section 144 when a submission is not filed.

Note that there will be no obligation to submit interest under section 234A of the act if the self-assessment tax is paid before the original due date. It implies that the CBDT’s objective is to extend the deadline for filing returns, not the deadline for making self-assessment tax payments.

Section 234A of Income Tax Act: Tax payment is subject to interest under clause 234A

When a regular assessment is made, the tax on total income as determined under that regular assessment is reduced by advance tax, tax deducted/collected at source, the relief claimed under various sections, such as sections 89/90/90A/91, and tax credit claimed under sections 115JAA/115JD. Interest is assessed under section 234A on the amount of tax as established under section 143(1).

This interest will be based on the amount of income tax due after the following deductions:

• Paid in advance tax (if any),
• Tax at source is deducted or collected (if available),
• the tax relief provided by section 89,
• Section 90 provides relief for taxes paid outside of India.
• Section 90A provides relief for taxes paid in a particular territory outside India.
• Amounts that are permitted under section 91 on account of taxes paid in a nation outside of India
• The system may offset tax credits in line with section 115JAA or section 115JD rules.

Section 234A of Income Tax Act: Interest penalty calculation 

Interest is added to the amount of tax payable after any prepayment tax, TDS/TCS, or self-assessment income payments made by the taxpayer have been subtracted.

• After adjustments, the net tax liability at the conclusion of the fiscal year is the net tax outstanding.
• The time between the due date and the official date of submitting returns is referred to as “months.”
• Interest is calculated by section 234A at a monthly rate of 1%.

Let’s use this example to learn about calculating the interest penalty under Section 234A.

The unpaid tax balance of Ravi, a salaried worker, is Rs 3 lakhs. He should have submitted his return by the deadline of June 15 and now pays it on December 15. As a result of his late payments, he will suffer the following consequences.

The following formula is used to calculate interest for late income tax return filing:

Interest (Penalty) = Outstanding tax x 1% x number of delayed months = 3,000 x 1% x 6 = Rs 18,000 for the total number of delayed months

Ravi would now be required to pay Rs 18,000 in an additional penalty on top of his unpaid tax. If he pays his dues before March, he will be charged 1% per month until the end of the fiscal year, which is March 31.

Section 234A of Income Tax Act: What if the due date is extended?

The due date to file an income tax return is frequently postponed. In this case, it is still being determined whether interest under Section 234A will apply from the original due date or the delayed due date.

The date provided in sub-section (1) of section 139 as it applies to the assessee is referred to as the “due date” under section 234A. The CBDT can modify the requirements for sections 139 and 234A by extending the due date under section 119. As a result, the CBDT extends the deadline for assessees to submit their income tax returns.

Sometimes, when the CBDT extends the due date, it is clear that interest under section 234A will start accruing on the original due date, not the extended due date. Therefore, the appeal under Section 234A will be calculated after the original due date and not the extended due date unless otherwise specified in the order.

Strategies for minimising interest payment under Section 234A

Make the payment on time to avoid penalty.

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