Section 234C of the Income Tax Act: Interest Imposed by the IT Department

Section 234C of the Income Tax Act: Interest Imposed by the IT Department. For ensuring timely and hassle-free collection of taxes, the Income Tax Act has laid down several provisions. One such critical provision is the requirement for taxpayers to pay advance tax in a phased manner during the financial year. If the taxpayer fails to pay advance tax as per the specified schedule, penal interest is charged under Section 234C of the Income Tax Act. This provision ensures that taxpayers contribute their share of tax liabilities on time, and delays are penalized appropriately.
What is Section 234C?
Section 234C of the Income Tax Act deals with the interest liability imposed by the Income Tax Department when there is a delay or shortfall in the payment of advance tax installments. Under this section, a penal interest of 1% per month is levied on the taxpayer if the advance tax is not paid as per the prescribed quarterly due dates. This interest continues to accrue until the date the shortfall is paid. The objective is to discourage late payments and ensure that tax payments are spread evenly throughout the year.
What is Advance Tax?
Advance tax refers to the income tax that must be paid in advance rather than at the end of the financial year. It is paid in installments on predetermined dates. This tax is calculated on the expected income of the taxpayer for the ongoing financial year. The provision of advance tax applies only when the tax liability after reducing TDS (Tax Deducted at Source) exceeds Rs. 10,000. Individuals, salaried persons, freelancers, and businesses are all required to pay advance tax if their estimated tax liability crosses this threshold.
Due Dates for Paying Advance Tax
The Income Tax Department has clearly defined the due dates for advance tax payments. Taxpayers who fail to adhere to these dates are liable to pay interest under Section 234C of the Income Tax Act. The due dates vary for normal taxpayers and those opting for presumptive taxation under sections 44AD or 44ADA.
For normal taxpayers, the advance tax must be paid as follows:

On or before 15th June: At least 15% of total advance tax payable.

On or before 15th September: At least 45% of total advance tax payable.

On or before 15th December: At least 75% of total advance tax payable.

On or before 15th March: 100% of total advance tax payable.

For taxpayers opting for presumptive income under section 44AD or 44ADA:

Only one installment is required, which is 100% of the advance tax payable, and it must be paid by 15th March.

Failure to pay the stipulated percentage by each due date results in interest under Section 234C.
How is Interest Charged Under Section 234C?
Interest under Section 234C is levied when there is a delay or shortfall in the payment of any installment of advance tax. The penal interest is calculated at the rate of 1% per month or part of a month on the amount of shortfall. The interest is computed from the due date of the installment till the date of actual payment.
The shortfall is calculated after deducting the tax already paid and TDS/TCS (Tax Collected at Source). If the taxpayer fails to pay:

At least 15% by 15th June,

At least 45% by 15th September,

At least 75% by 15th December,

And 100% by 15th March, then interest will be levied accordingly for each shortfall.

Example: If the advance tax due by 15th June is Rs. 1,50,000 but only Rs. 50,000 is paid, then interest at 1% per month will be charged on the shortfall of Rs. 1,00,000 for three months (i.e., till 15th September).
Calculation of Interest Under Section 234C
The method of calculation of interest under Section 234C varies depending on whether the taxpayer is under the presumptive taxation scheme or not. There are two scenarios for interest computation:
1. Taxpayer Not Opting for Presumptive Taxation (Normal Taxpayer) In this case, interest is charged based on the percentage of tax that should have been paid by each due date. The interest is calculated at 1% per month for three months (except for the last installment, which is charged for one month).
For example:

Less than 15% paid by 15th June: Interest = 1% x 3 months x shortfall amount

Less than 45% paid by 15th September: Interest = 1% x 3 months x shortfall amount

Less than 75% paid by 15th December: Interest = 1% x 3 months x shortfall amount

Less than 100% paid by 15th March: Interest = 1% x 1 month x shortfall amount

Let us understand with an example:
Total Tax Liability = Rs. 10,00,000
Advance Tax Payment Schedule:

15th June: Due = Rs. 1,50,000; Paid = Rs. 50,000; Shortfall = Rs. 1,00,000; Interest = Rs. 3,000 (1% x 3 months)

15th September: Due = Rs. 4,50,000; Paid = Rs. 2,50,000; Shortfall = Rs. 2,00,000; Interest = Rs. 6,000

15th December: Due = Rs. 7,50,000; Paid = Rs. 3,50,000; Shortfall = Rs. 4,00,000; Interest = Rs. 12,000

15th March: Due = Rs. 10,00,000; Paid = Rs. 5,00,000; Shortfall = Rs. 5,00,000; Interest = Rs. 5,000

Total Interest under Section 234C = Rs. 26,000
1. Taxpayer Opting for Presumptive Taxation (Section 44AD/44ADA) For taxpayers under the presumptive taxation scheme, the advance tax is required to be paid in only one installment:

By 15th March: 100% of the total advance tax payable.

If the entire tax is not paid by this date, interest under Section 234C is charged at 1% per month on the shortfall for one month. No interest is charged for earlier quarters.
Applicability and Non-Applicability of Section 234C of the Income Tax Act
The provisions of Section 234C are applicable only when the taxpayer fails to pay advance tax as per the due dates. The section becomes applicable in the following scenarios:

Advance tax paid by 15th June is less than 15% of the total tax liability.

Advance tax paid by 15th September is less than 45% of the total tax liability.

Advance tax paid by 15th December is less than 75% of the total tax liability.

Advance tax paid by 15th March is less than 100% of the total tax liability.

This provision is applicable to all taxpayers except those explicitly exempted under the law. It ensures that taxpayers contribute their due share of taxes progressively throughout the year.
However, there are certain cases where Section 234C is not applicable. The non-applicability conditions are as follows:

If the shortfall in advance tax is due to capital gains or speculative income such as winnings from lotteries, betting, gambling, etc.

If the shortfall arises due to income from a new business or profession which was not anticipated.

If the shortfall is due to dividend income exceeding Rs. 10,000 from a domestic company and such income could not be estimated in advance.

Exceptions Where Interest Under Section 234C is Not Applicable
There are specific exceptions where interest under Section 234C is not levied. These exceptions are provided to ensure that genuine cases of non-estimation of income do not get penalized.
1. Resident Senior Citizens: If a resident senior citizen (aged 60 years or above) does not have any income under the head "Profits and gains of business or profession," he or she is not required to pay advance tax. Hence, Section 234C is not applicable.
2. Tax Liability Below Rs. 10,000: If the net tax payable after adjusting TDS and other credits is less than Rs. 10,000, the taxpayer is not required to pay advance tax. Therefore, Section 234C does not apply.
3. Unexpected Incomes: No interest is payable under Section 234C if the shortfall is due to:

Capital Gains

Winnings from lotteries or similar income

Income from newly started business or profession

Dividends in excess of Rs. 10,000 However, to avoid interest, the taxpayer must pay the tax on such income in the remaining installments or by the end of the financial year.

Filing ITR and Claiming Refund of Excess Advance Tax
With the commencement of Income Tax Return (ITR) filing for the Financial Year 2024-25, it is important to reconcile your advance tax payments. If you have paid excess advance tax, you can claim a refund while filing your ITR. It is important to file your return accurately and on time to avoid penalties and delays in getting the refund.
If you are unsure about your tax computations, consult a tax expert or a Chartered Accountant. Compliance Calendar LLP provides professional assistance for CA-assisted ITR filing services to ensure that your tax filing is error-free and you get your rightful refund in time.
Conclusion
Section 234C of the Income Tax Act plays an important role in ensuring timely tax compliance. It imposes penal interest on taxpayers who delay the payment of advance tax as per the scheduled dates. The provision applies to both individual taxpayers and businesses, with certain exceptions granted in genuine cases. Understanding the due dates, interest calculation, and applicability is essential for every taxpayer. Filing your taxes accurately and timely helps avoid penalties and keeps your financial record clean. To stay compliant and efficient in your tax matters, always consider seeking professional help from experts like Compliance Calendar LLP. Connect through mail at info@ccoffice.in or Call/Whatsapp at +91 9988424211.
FAQs
Q1. What is Section 234C of the Income Tax Act?
Ans. Section 234C of the Income Tax Act deals with interest imposed by the Income Tax Department for the delayed payment or short payment of advance tax. Taxpayers are required to pay advance tax in four installments throughout the financial year. If they miss any due date or underpay the amount, interest at 1% per month is charged on the shortfall.
Q2. Who is required to pay advance tax and hence, may be liable under Section 234C?
Ans. Any taxpayer whose tax liability for a financial year exceeds Rs. 10,000 after adjusting TDS/TCS is required to pay advance tax. This includes salaried individuals, professionals, and businesses. If these taxpayers fail to pay the required percentage of advance tax on or before the scheduled dates, Section 234C interest may be applicable.
Q3. What is the rate of interest charged under Section 234C?
Ans. The interest under Section 234C is charged at the rate of 1% per month or part thereof on the amount of shortfall. The interest is calculated for three months for the first three quarters (June, September, and December), and for one month in the fourth quarter (March).
Q4. Is a senior citizen liable to pay interest under Section 234C?
Ans. A resident senior citizen (aged 60 years or more) who does not have income from business or profession is not required to pay advance tax. Hence, they are not liable to pay interest under Section 234C. This exemption makes it easier for senior citizens to manage their tax obligations without worrying about installment deadlines.
Q5. Can interest under Section 234C be avoided in case of capital gains or lottery winnings?
Ans. Yes, interest under Section 234C is not levied if the shortfall in advance tax is due to unexpected incomes such as capital gains, winnings from lotteries, or income from a new business or profession. However, to avoid interest, the taxpayer must pay the tax on such income in the remaining installments or by the end of the financial year.
Q6. How is the shortfall in advance tax calculated for Section 234C?
Ans. The shortfall is calculated based on the difference between the required percentage of advance tax (as per due date) and the actual amount paid. The taxpayer's total tax liability is reduced by TDS/TCS, and the applicable percentage (15%, 45%, 75%, or 100%) is applied to determine the required installment amount. Interest is charged on the shortfall from this required amount.
Q7. What if I pay more advance tax than required? Can I get a refund?
Ans. Yes, if you have paid excess advance tax beyond your actual tax liability, you can claim a refund at the time of filing your Income Tax Return (ITR). Make sure your ITR is filed accurately and within the deadline to ensure a smooth refund process. It is advisable to seek help from a Chartered Accountant or a tax professional for error-free filing.

For ensuring timely and hassle-free collection of taxes, the Income Tax Act has laid down several provisions. One such critical provision is the requirement for taxpayers to pay advance tax in a phased manner during the financial year. If the taxpayer fails to pay advance tax as per the specified schedule, penal interest is charged under Section 234C of the Income Tax Act. This provision ensures that taxpayers contribute their share of tax liabilities on time, and delays are penalized appropriately.

What is Section 234C?

Section 234C of the Income Tax Act deals with the interest liability imposed by the Income Tax Department when there is a delay or shortfall in the payment of advance tax installments. Under this section, a penal interest of 1% per month is levied on the taxpayer if the advance tax is not paid as per the prescribed quarterly due dates. This interest continues to accrue until the date the shortfall is paid. The objective is to discourage late payments and ensure that tax payments are spread evenly throughout the year.

What is Advance Tax?

Advance tax refers to the income tax that must be paid in advance rather than at the end of the financial year. It is paid in installments on predetermined dates. This tax is calculated on the expected income of the taxpayer for the ongoing financial year. The provision of advance tax applies only when the tax liability after reducing TDS (Tax Deducted at Source) exceeds Rs. 10,000. Individuals, salaried persons, freelancers, and businesses are all required to pay advance tax if their estimated tax liability crosses this threshold.

Due Dates for Paying Advance Tax

The Income Tax Department has clearly defined the due dates for advance tax payments. Taxpayers who fail to adhere to these dates are liable to pay interest under Section 234C of the Income Tax Act. The due dates vary for normal taxpayers and those opting for presumptive taxation under sections 44AD or 44ADA.

For normal taxpayers, the advance tax must be paid as follows:

On or before 15th June: At least 15% of total advance tax payable.
On or before 15th September: At least 45% of total advance tax payable.
On or before 15th December: At least 75% of total advance tax payable.
On or before 15th March: 100% of total advance tax payable.

For taxpayers opting for presumptive income under section 44AD or 44ADA:

Only one installment is required, which is 100% of the advance tax payable, and it must be paid by 15th March.

Failure to pay the stipulated percentage by each due date results in interest under Section 234C.

How is Interest Charged Under Section 234C?

Interest under Section 234C is levied when there is a delay or shortfall in the payment of any installment of advance tax. The penal interest is calculated at the rate of 1% per month or part of a month on the amount of shortfall. The interest is computed from the due date of the installment till the date of actual payment.

The shortfall is calculated after deducting the tax already paid and TDS/TCS (Tax Collected at Source). If the taxpayer fails to pay:

At least 15% by 15th June,
At least 45% by 15th September,
At least 75% by 15th December,
And 100% by 15th March, then interest will be levied accordingly for each shortfall.

Example: If the advance tax due by 15th June is Rs. 1,50,000 but only Rs. 50,000 is paid, then interest at 1% per month will be charged on the shortfall of Rs. 1,00,000 for three months (i.e., till 15th September).

Calculation of Interest Under Section 234C

The method of calculation of interest under Section 234C varies depending on whether the taxpayer is under the presumptive taxation scheme or not. There are two scenarios for interest computation:

1. Taxpayer Not Opting for Presumptive Taxation (Normal Taxpayer) In this case, interest is charged based on the percentage of tax that should have been paid by each due date. The interest is calculated at 1% per month for three months (except for the last installment, which is charged for one month).

For example:

Less than 15% paid by 15th June: Interest = 1% x 3 months x shortfall amount
Less than 45% paid by 15th September: Interest = 1% x 3 months x shortfall amount
Less than 75% paid by 15th December: Interest = 1% x 3 months x shortfall amount
Less than 100% paid by 15th March: Interest = 1% x 1 month x shortfall amount

Let us understand with an example:

Total Tax Liability = Rs. 10,00,000

Advance Tax Payment Schedule:

15th June: Due = Rs. 1,50,000; Paid = Rs. 50,000; Shortfall = Rs. 1,00,000; Interest = Rs. 3,000 (1% x 3 months)
15th September: Due = Rs. 4,50,000; Paid = Rs. 2,50,000; Shortfall = Rs. 2,00,000; Interest = Rs. 6,000
15th December: Due = Rs. 7,50,000; Paid = Rs. 3,50,000; Shortfall = Rs. 4,00,000; Interest = Rs. 12,000
15th March: Due = Rs. 10,00,000; Paid = Rs. 5,00,000; Shortfall = Rs. 5,00,000; Interest = Rs. 5,000

Total Interest under Section 234C = Rs. 26,000

1. Taxpayer Opting for Presumptive Taxation (Section 44AD/44ADA) For taxpayers under the presumptive taxation scheme, the advance tax is required to be paid in only one installment:

By 15th March: 100% of the total advance tax payable.

If the entire tax is not paid by this date, interest under Section 234C is charged at 1% per month on the shortfall for one month. No interest is charged for earlier quarters.

Applicability and Non-Applicability of Section 234C of the Income Tax Act

The provisions of Section 234C are applicable only when the taxpayer fails to pay advance tax as per the due dates. The section becomes applicable in the following scenarios:

Advance tax paid by 15th June is less than 15% of the total tax liability.
Advance tax paid by 15th September is less than 45% of the total tax liability.
Advance tax paid by 15th December is less than 75% of the total tax liability.
Advance tax paid by 15th March is less than 100% of the total tax liability.

This provision is applicable to all taxpayers except those explicitly exempted under the law. It ensures that taxpayers contribute their due share of taxes progressively throughout the year.

However, there are certain cases where Section 234C is not applicable. The non-applicability conditions are as follows:

If the shortfall in advance tax is due to capital gains or speculative income such as winnings from lotteries, betting, gambling, etc.
If the shortfall arises due to income from a new business or profession which was not anticipated.
If the shortfall is due to dividend income exceeding Rs. 10,000 from a domestic company and such income could not be estimated in advance.

Exceptions Where Interest Under Section 234C is Not Applicable

There are specific exceptions where interest under Section 234C is not levied. These exceptions are provided to ensure that genuine cases of non-estimation of income do not get penalized.

1. Resident Senior Citizens: If a resident senior citizen (aged 60 years or above) does not have any income under the head "Profits and gains of business or profession," he or she is not required to pay advance tax. Hence, Section 234C is not applicable.

2. Tax Liability Below Rs. 10,000: If the net tax payable after adjusting TDS and other credits is less than Rs. 10,000, the taxpayer is not required to pay advance tax. Therefore, Section 234C does not apply.

3. Unexpected Incomes: No interest is payable under Section 234C if the shortfall is due to:

Capital Gains
Winnings from lotteries or similar income
Income from newly started business or profession
Dividends in excess of Rs. 10,000 However, to avoid interest, the taxpayer must pay the tax on such income in the remaining installments or by the end of the financial year.

Filing ITR and Claiming Refund of Excess Advance Tax

With the commencement of Income Tax Return (ITR) filing for the Financial Year 2024-25, it is important to reconcile your advance tax payments. If you have paid excess advance tax, you can claim a refund while filing your ITR. It is important to file your return accurately and on time to avoid penalties and delays in getting the refund.

If you are unsure about your tax computations, consult a tax expert or a Chartered Accountant. Compliance Calendar LLP provides professional assistance for CA-assisted ITR filing services to ensure that your tax filing is error-free and you get your rightful refund in time.

Conclusion

Section 234C of the Income Tax Act plays an important role in ensuring timely tax compliance. It imposes penal interest on taxpayers who delay the payment of advance tax as per the scheduled dates. The provision applies to both individual taxpayers and businesses, with certain exceptions granted in genuine cases. Understanding the due dates, interest calculation, and applicability is essential for every taxpayer. Filing your taxes accurately and timely helps avoid penalties and keeps your financial record clean. To stay compliant and efficient in your tax matters, always consider seeking professional help from experts like Compliance Calendar LLP. Connect through mail at info@ccoffice.in or Call/Whatsapp at +91 9988424211.

FAQs

Q1. What is Section 234C of the Income Tax Act?

Ans. Section 234C of the Income Tax Act deals with interest imposed by the Income Tax Department for the delayed payment or short payment of advance tax. Taxpayers are required to pay advance tax in four installments throughout the financial year. If they miss any due date or underpay the amount, interest at 1% per month is charged on the shortfall.

Q2. Who is required to pay advance tax and hence, may be liable under Section 234C?

Ans. Any taxpayer whose tax liability for a financial year exceeds Rs. 10,000 after adjusting TDS/TCS is required to pay advance tax. This includes salaried individuals, professionals, and businesses. If these taxpayers fail to pay the required percentage of advance tax on or before the scheduled dates, Section 234C interest may be applicable.

Q3. What is the rate of interest charged under Section 234C?

Ans. The interest under Section 234C is charged at the rate of 1% per month or part thereof on the amount of shortfall. The interest is calculated for three months for the first three quarters (June, September, and December), and for one month in the fourth quarter (March).

Q4. Is a senior citizen liable to pay interest under Section 234C?

Ans. A resident senior citizen (aged 60 years or more) who does not have income from business or profession is not required to pay advance tax. Hence, they are not liable to pay interest under Section 234C. This exemption makes it easier for senior citizens to manage their tax obligations without worrying about installment deadlines.

Q5. Can interest under Section 234C be avoided in case of capital gains or lottery winnings?

Ans. Yes, interest under Section 234C is not levied if the shortfall in advance tax is due to unexpected incomes such as capital gains, winnings from lotteries, or income from a new business or profession. However, to avoid interest, the taxpayer must pay the tax on such income in the remaining installments or by the end of the financial year.

Q6. How is the shortfall in advance tax calculated for Section 234C?

Ans. The shortfall is calculated based on the difference between the required percentage of advance tax (as per due date) and the actual amount paid. The taxpayer's total tax liability is reduced by TDS/TCS, and the applicable percentage (15%, 45%, 75%, or 100%) is applied to determine the required installment amount. Interest is charged on the shortfall from this required amount.

Q7. What if I pay more advance tax than required? Can I get a refund?

Ans. Yes, if you have paid excess advance tax beyond your actual tax liability, you can claim a refund at the time of filing your Income Tax Return (ITR). Make sure your ITR is filed accurately and within the deadline to ensure a smooth refund process. It is advisable to seek help from a Chartered Accountant or a tax professional for error-free filing.