This is how IT dept calculates penalty on advance tax default

Not complying with income tax regulations often comes with serious repercussions. You have to pay interest based on Section 234 of the Income Tax Act.

Default in filing of tax returns - Section 234A (Read series 1 here )

Default in payment of advance tax - Section 234B

Deferment of advance tax- Section 234C

Here’s how the interest and the calculations are done. This is a three-post series and this is the second post. It deals with Section 234B.

Part II: Section 234B

(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 instalments 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).

Late payment interest

You need to pay at least 90 percent of your total advance tax liability before 31 March to avoid interest. The income tax department waives off interest if the outstanding tax amount is less than 10 percent of the total tax liability for the financial year.

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

Illustration

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

Interest = 90,000 x 1 percent x 4 = Rs 3,600

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

K.R. Gupta, is chairman www.ClearTax.in .He retired as member, Central Board of Direct Taxes, Ministry of Finance. He has more than 50 years experience in taxation and financial matters.