234C – Interest for deferment of advance tax

Section 234C of the Indian Income Tax Act deals with the interest charged on the deferment or underestimation of advance tax installments. It applies when a taxpayer is required to pay advance tax in multiple installments during the financial year, and they fail to pay the due amount on time or underestimate the required installment.

The purpose of Section 234C is to ensure that taxpayers pay their advance tax liability as per the prescribed schedule to avoid any undue benefits from deferring the tax payment.

There are three sub-sections under Section 234C that cover different situations:

1. Section 234C(1): This subsection applies when a taxpayer has not paid the first installment or has paid an amount that is less than the required percentage of advance tax. The interest is charged at a simple interest rate of 1% per month or part of the month on the amount of underpaid installment.
2. Section 234C(2): This subsection applies when a taxpayer has not paid the second installment or has paid an amount that is less than the required percentage of advance tax. The interest is charged at a simple interest rate of 1% per month or part of the month on the amount of underpaid installment.
3. Section 234C(3): This subsection applies when a taxpayer has not paid the third installment or has paid an amount that is less than the required percentage of advance tax. The interest is charged at a simple interest rate of 1% per month or part of the month on the amount of underpaid installment.

It’s important to note that the interest under Section 234C is calculated for each installment separately and is levied from the due date of each installment to the actual date of payment. This means that if a taxpayer pays the installment after the due date, they will be charged interest for the delay.

Taxpayers are required to accurately estimate their income and tax liability to calculate the advance tax installments correctly. Failure to pay the installments on time or underestimating the tax liability may result in additional interest charges under Section 234C.

Example

Let’s consider an example of an individual taxpayer named Maya to understand how Section 234C works:

Assumptions:

• Maya’s total estimated income for the financial year 2023-2024 (assessment year 2024-2025): Rs. 15,00,000
• Assume Income tax rate applicable to her: 10%
• Due dates for advance tax installments: 15th June 2023, 15th September 2023, 15th December 2023, 15th March 2024
• Maya fails to pay the first and second installment on time and underestimates the amount in the third installment.

Advance Tax Liability Calculation: Maya’s total estimated tax liability for the year is Rs. 1,50,000 (10% of Rs. 15,00,000).

1. 1st Installment (Due on 15th June 2023): Advance Tax Installment (15% of Rs. 1,50,000): Rs. 22,500, she did not paid
2. 2nd Installment (Due on 15th September 2023): Advance Tax Installment (45% of Rs. 1,50,000): Rs. 67,500, she did not paid
3. 3rd Installment (Due on 15th December 2023): Maya underestimates the third installment and pays only Rs. 30,000 instead of the required amount (75% of Rs. 1,50,000 = Rs. 1,12,500).

Calculation of Interest under Section 234C:

1. First Installment (234C(1)): Interest on Underpaid Amount (Rs. 22,500) = Rs. 22,500 * 1% * 3 months = Rs. 675
2. Second Installment (234C(2)): Interest on Underpaid Amount (Rs. 67,500) = Rs. 67,500 * 1% * 3 months = Rs. 2,025
3. Third Installment (234C(3)): Interest on Underpaid Amount (Rs. 82,500, i.e., Rs. 1,12,500 – Rs. 30,000) = Rs. 82,500 * 1% * 1 month = Rs. 825

Total Interest under Section 234C: Total Interest = Rs. 675 (234C(1)) + Rs. 2,025 (234C(2)) + Rs. 825 (234C(3)) = Rs. 3,525

So, Maya will have to pay an additional interest of Rs. 3,525 due to the underestimation and delayed payment of advance tax installments.

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