How is Interest for Deferment of Advance Tax Calculated?

The income tax department makes it convenient for taxpayers to pay their income tax returns by offering an advance tax payment facility. Instead of paying your taxes in one instalment, you can spread it across four instalments and pay it over the financial year.Note that all individuals who are not subject to TDS are required to pay advance tax by law. Even if you are a salaried professional, if you have other sources of income like home rents, interest earned from fixed deposits, capital gains, you have to pay the advance tax for your other income sources.However, not many taxpayers are aware of this clause, and they end up paying penalties in the form of interest. Here, in this guide, we share with you how the interest is calculated for the late payment of advance tax.

As per the ITA rules, eligible taxpayers have to pay advance tax four times in a fiscal year:

• 15% of your tax liability before 15thJune
• 45% of your tax liability before 15thSeptember
• 75% of your tax liability before 15thDecember
• And, 100% of your tax liability before 15thMarch

If you fail to pay the advance tax before these deadlines, then the income tax department charges interest on the late payment. The interests are calculated under two sections.

1. Section 234C Under this section, the late payment of the advanced tax attracts an interest of 1% calculated as simple interest. The period for which interest is calculated depends on how late you make the payment. The income tax department starts interest calculation from the due date to the date of payment.To give an example, let’s say, you are required to pay Rs. 50,000 as advance income tax by 15thSeptember, but you make the payment only by 15thDecember. Then, the interest is calculated for three months, at a rate of 1% starting from 15thSeptember.
2. Section 234B If you do not pay 90% of the tax before the end of the financial year, then you are charged a penalty of 1% interest. Failing to pay taxes for an assessment year or paying less than 90% of the tax payable is considered as defaulting of tax payment.Besides this interest charged, there’s another interest charged for excess refunds. For example, the income tax department offers you a refund based on the advance tax you have paid. However, if on assessment, if the income tax officials find that you have been provided with an excess refund, then you are required to return the refund amount along with an interest of 0.5%.

Make sure to pay your advance tax on-time to avoid the interest penalties due to deferred payments.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.