Understanding Interest Provisions under Various Sections of the Income-tax Act: A Practical Guide for Taxpayers

Introduction

In the realm of income-tax compliance, interest under sections 234A, 234B, 234C, and 234D acts as a deterrent against delay or default in return filing, advance tax payments, and refund claims. Unlike penalties which may require a show cause or adjudication, interest is mandatory and automatic upon non-compliance with timelines prescribed under the Income-tax Act, 1961.

This article unpacks each of these four interest provisions-highlighting when and how they are levied, the method of computation, and the exceptions or relief available-based on consolidated FAQs issued and interpreted by the Department.

Section 234A - Interest for Delay in Filing of Return

When Applicable:

Interest under Section 234A is levied when:

Return of income is filed after the due date prescribed u/s 139(1), or

The return is not filed at all.

Rate:

1% per month or part thereof (simple interest)

Period:

From the day immediately after the due date to:

The actual date of filing, or

The date of completion of best judgment assessment (if return not filed)

Important Clarification:

As per CBDT Circular No. 2/2015 dated 10.02.2015, no interest under section 234A shall be levied on self-assessment tax paid before due date, even if the return is filed late.

Special Scenarios:

•    If return is furnished late in response to notice under Section 148, interest is charged from expiry of time in the notice till actual filing.

•    If no return is furnished under Section 148, interest is charged till completion of reassessment.

•     If only an updated return is filed under section 139(8A), interest applies from the original due date till date of updated return.

Section 234B - Interest for Non-payment or Short Payment of Advance Tax

When Applicable:

Interest under Section 234B is attracted when:

•     A person is liable to pay advance tax (i.e., tax payable < `10,000), but fails to pay, or

•     Pays less than 90% of the assessed tax as advance tax.

Rate:

•    1% per month or part thereof (simple interest)

Period of Computation:

From 1st April of the assessment year to:

•   Date of filing return/self-assessment tax payment (if accepted without scrutiny), or

•   Date of regular assessment or reassessment, whichever is applicable

Amount on Which Interest is Levied:

•    Entire assessed tax (less TDS, relief u/s 89, MAT/AMT credit, FTC, etc.) if no advance tax paid

•    Shortfall between advance tax paid and 90% of assessed tax, if some tax was paid

•    In Case of Reassessment (u/s 147):

•    Interest is computed from 1st April of AY till reassessment date, on the differential tax liability

Section 234C - Interest for Deferment of Advance Tax Instalments

When Applicable:

Interest under Section 234C applies when the taxpayer pays advance tax in instalments but:

The amount paid is less than the prescribed percentage for each due date

Due Dates and Percentages:

Due Date                       Minimum % of Assessed Tax to be Paid
15th June                        15%                 
15th September               45%
15th December               75%
15th March                     100%

For presumptive taxation assessees (u/s 44AD or 44ADA):

100% of advance tax must be paid by 15th March

Rate:

1% per month, for 3 months (for first 3 instalments), and 1 month for March shortfall

Calculation (Illustrative):

Exemptions from Interest:

No interest under Section 234C if the shortfall is due to underestimation of:

•   Capital gains

•    Winnings from lottery, crossword, betting, etc.

•    Business/professional income arising for the first time

•    Dividend income

Provided that the tax on such income is paid in the remaining instalments or before 31st March.

Section 234D - Interest on Excess Refund Granted

When Applicable:

When a refund is issued to the assessee under summary assessment u/s 143(1) but:

•    No refund is ultimately due in regular assessment, or

•    The refund was in excess

Rate:

0.5% per month or part thereof (simple interest)

Period:

From the date of grant of refund under 143(1) to the date of completion of regular assessment

Amount:

•   Entire refund if no refund was due

•    Excess refund amount if refund was partially due

Quick Snapshot of All Four Sections

Conclusion

Interest under Sections 234A to 234D serves as a strict compensatory measure for revenue loss due to non-compliance. Unlike penalties, which require discretionary invocation, these interest provisions are automatic, non-waivable (except in few CBDT powers), and computed as per rules.

For every taxpayer, especially professionals and businesses, it is imperative to:

•   File return on time

•   Discharge advance tax liability correctly

•   Monitor refunds cautiously

•   Be aware of updated and belated return implications

With automation and data trails through AIS and Form 26AS, the Income-tax Department`s systems can compute these interests automatically. Hence, due diligence is the key to avoiding unnecessary financial and compliance costs.