How is Interest Calculated Under Section 234A ?

Yes, you have to pay Interest to the Government in case you don’t pay taxes on time and don’t file a return on time. If you are filing Income Tax Return (ITR) without professional help or using any software for ITR, you may not be aware how interest is calculated under section 234A of Income Tax . We will try to understand interest under section 234A of Income Tax Act,1961 by Indian Taxpayers.

Section 234A – Interest for defaults in furnishing return of income

If you missed the timeline for filing a return and there is liability to pay Income tax , you have to pay interest @ 1% per month from the due date of filing of return to date of actual filing of return . In case you have not filed a return yet then it will be calculated from the due date of filing return to the date of completion of assessment .

Example

Say you are liable to pay Income Tax of Rs.7479 . Due date for return filing in your case is 31st July . You are filing your return on 10th Sep so you are late by 1 month and 10 days . We have to round off the tax to the nearest 100 . Further we need to consider part of the month as a full month . You are liable to pay interest @ 1% on Rs.7400 for 2 months . Oh My God , I have to pay Interest for full August instead of 10 days ? yes it is like this so technically your effective interest rate will be more than 1% per month . It is more than FD rates what you have earned during the same period. You can check FD rate on ET website . Final interest under section 234A is Rs. 148 .

Now you may wonder how Rs.7479 tax payable is derived . You have to calculate gross tax liability as per Income Tax and reduce it by advance tax, Tax Deducted at Source (TDS), Tax Collected at Source (TCS) and relief claimed under various sections like sections 89/90/90A/91 and tax credit claimed under section 115JAA/115JD .

Hope you have got an idea about Interest calculation under section 234A. Year end is approaching and it is time to submit investment proof and plan your taxes in advance before March . Do you Know – National Pension Scheme – NPS can give benefit up to 42% in first year . Do read our post for better understanding about NPS.