Penalty Under Income Tax Act 1961

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Interest and Late Fee

Interest Imposed by the IT Department – Section 234A

Types of Interest

There are 4 different interest under section 234:

  • Delay in filing of Tax Returns            – Section 234A
  • Delay in payment of Advance Tax      – Section 234B
  • Deferred Payment of Advance Tax     – Section 234C
  • Late fee for delay in return                 – Section 234 F

Introduction to Section 234A – Interest for Default in Filing Tax Return

Income Tax Returns for a financial year need to be filed within the time limit prescribed for each year for you. Your failure to file a return within this prescribed time or not file at all will attract this Interest. 

Now, when you do not file your returns or miss the due date, you could be in one of these 3 distinct positions:

  1. You have taxes outstanding to be paid to the IT department
  2. You are eligible for a tax refund from the IT department
  3. Your taxes have been paid on time with no refund expected or taxes payable.

If you fall into buckets “2” or “3”, you do not have to worry too much about late filing of your tax returns as interest may not be applicable in these two scenarios. However, your Assessing Officer may still choose to charge some interest if he thinks it necessary.

If you have unpaid taxes that are outstanding and you have not filed your returns by the due date, you are in for trouble. You will be charged an interest amount of 1% per month or part of the month (simple interest) on the tax amount outstanding. This interest will be calculated from the due date applicable to you for filing of return of the relevant financial year till the date that you actually file your return.

Illustration

Say, your total tax outstanding for F.Y 2018-19 is Rs 1 lakh (net of Adv tax paid &Tds any) and you file your return on the 31st March, 2020  instead of 31st August 2019, the due date to file income tax return for FY 2018-19. You are now 7 months late in your tax payments. Interest = 100,000 x 1% x 7 = Rs. 7,000. This Rs. 7,000 is over and above the tax amount that you will be paying in any case. If you do not file your return at all, you will have to pay 1% interest till the end of the assessment year i.e. 31st March.

Interest Imposed by the IT Department – Section 234B

1. What is Advance Tax?

If you have to pay Rs 10,000 or more in Taxes in a FY, advance tax may be applicable to you. Advance Tax means paying your tax dues on the Due dates provided by the income tax department. If you don’t pay advance tax on time or default completely, you may be liable to pay interest under section 234B.

2. Who needs to pay Advance Tax?

All assesses including salaried employees, self-employed professionals, businessmen etc. are required to pay Advance Tax, where the tax payable even after reducing TDS already is Rs 10,000 or more.  

3. Interest under Section 234B

Interest under section 234B is applicable when:

  • Your tax liability after reducing TDS for the financial year is more than Rs 10,000 and you did not pay any advance tax.

OR

  • You paid advance tax, but advance tax paid is less than 90% of ‘assessed tax’.

In any one of the above cases, interest under section 234B shall be applicable. Interest is calculated @ 1% on Assessed Tax less Advance Tax. Part of a month is rounded off to a full month. Interest calculates from 01 April till the actual date of payment.

Example 1: Radhika’s total tax liability is Rs 48,000. Radhika paid this amount on 12th June while filling her return. No tax was deducted at source in her case. Radhika’s total tax liability is more than Rs 10,000, and hence she was liable to pay advance tax. As a result, Radhika will be liable to pay interest under section 234B. Interest calculation Rs 48,000 x 1% x 3 (April, May, June) = Rs 1,440 Radhika is liable to pay Rs 1,440 interest as per section 234B. 

Example 2: Arnav had a total tax payable of Rs 56,000, out of which Rs 48,000 was paid by him on 29th March as advance tax. The remaining balance of Rs 8,000 was paid by Arnav at the time he was filing his return on 30th May. Even though Arnav has paid advance tax, we need to check whether he paid at least 90% of the assessed tax as advance tax or not. Assessed tax is Rs 56,000. 90% of assessed tax is Rs 50,400.

However, Arnav deposited only Rs 48,000, which is less than 90% of assessed tax. Therefore, Arnav is liable to pay interest under section 234B. Interest calculation 56,000(assessed tax) – Rs 48,000 (advance tax) = 8,000 8,000 x 1% x 2 (April and May) = Rs 160. Rs 160 is the interest payable under section 234B by Arnav.

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

1. Due dates for paying Advance Tax

The Income Tax department expects you to pay your Taxes on time , otherwise you will be charged interest for late payment, at the time of Filling your Returns.Advance tax is paid on the following dates of a financial year:

2. Interest

  The interest for late payment is set at 1% on the amount of tax due. It is calculated from the individual cut off dates shown above, till the date of actual payment of outstanding taxes.

3. Example

Consider that your total tax liability for this financial year is Rs. 100,000 and it needs to be paid in installments as explained above. Assume there is no TDS here.

If you made partial payments instead, you will be liable to pay interest as per the last column in the table below:

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

Note: The last date to file your ITR for the AY 2020-21 is extended to 30 November 2020. 

 Penalty for Late Filing u/s 234F

As per the changed rules notified under section 234F of the Income Tax Act which came into effect from 1 April 2017, filing your ITR post the deadline, can make you liable to pay a maximum penalty of Rs 10,000. 

To break this down; if you file post 30 November but before December of this year (i.e. 2020), a penalty of Rs 5000 will be levied. For returns filed after December 2020, penalty limit will be increased to Rs 10,000. However, as a relief to small taxpayers, the IT department has stated that if your total income is not more than Rs 5 lakh, the maximum penalty levied for delay will only be Rs 1000.  

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