The government extended the due dates for filing income tax returns to December 31, 2020 (non-audit) and January 31, 2021 (for audit cases) for AY 2020-21. However, there is no relief from penal interest liabilities that may arise for a taxpayer required to pay advance tax. Taxpayers defaulting in the payment of advance tax need to pay penal interest under section 234B until the dues are paid. Further, though the government extended the tax filing due date, the extension does not apply for paying tax dues above Rs 1 lakh. A penal interest of 1 per cent a month is applicable on the self-assessment tax due.
Let us understand the interest liabilities arising at the time of e-filing.
Interest liability for default in advance tax
Taxpayers are required to calculate their estimated income-tax liability for the ongoing financial year, and pay advance tax. You are liable to pay advance tax when the tax liability after reducing TDS, TCS and other tax credits is Rs 10,000 or more, for a financial year. However, senior citizens (60 years and above) not having a business are exempt from paying advance tax.
We consider the FY 2019-20 as corresponding to the tax filing for AY 2020-21. A taxpayer had to estimate her tax liability and pay advance tax in four instalments: 15th of June, September, December and March. Any deferment in paying the advance tax instalments results in interest liability 1 percent p.m. under section 234C. This is still applicable to taxpayers even though the tax-filing date has been extended.
Apart from the deferment of advance tax and the interest liability thereon, the taxpayer becomes liable to pay interest for default of advance tax if she fails to pay at least 90 percent of the tax dues by March 31, 2020. The penal interest liability arises under section 234B which is calculated on the balance tax liability from April 1, 2020 until the date when the tax is paid.
For example, for the FY 2019-20, against the total tax liability of Rs 2,00,000, the taxes paid by way of TDS and advance tax are Rs 1,50,000. Here the aggregate tax payments fall short of 90 percent of the tax dues which is Rs 1,80,000. Hence, an interest liability arises under section 234B for default of payment of advance tax. The interest calculation on the balance tax of Rs 50,000 is as under:
-0.75 percent p.m. from April 1, 2020 to 30 June 2020 (reduced rate as a COVID-19 relief).
-1 percent p.m. from July 1, 2020 till the date of the payment of tax.
The interest liability under section 234B continues irrespective of the extension of the due date. Early payment of your tax dues before waiting for the due date can help avoid further interest liability.
Interest liability for dues above Rs 1 lakh
Despite the extensions given for return filing, a taxpayer having balance self-assessment tax dues above Rs 1 lakh should have made the payment by July 31, 2020 for non-audit, and October 31, 2020 for audit cases.
Non-payment of tax by July 31, 2020 or October 31, 2020 makes the taxpayer liable for penal interest at the rate of 1 percent p.m. until the date of payment. Interest is levied is under section 234A of the Income Tax Act.
For example, if the balance tax due of a salaried employee is Rs 1,10,000 after TDS, advance tax payments and other tax credits, the interest liability is 1 percent, which is Rs 1,100 for each month beginning August 2020, until the date of payment.
Depending on the income-tax calculation of the taxpayer, there may be one or more interest liabilities at the time of filing the income tax return. The taxpayer should calculate all interest dues and pay them along with the self-assessment tax before e-filing their income tax return.(The writer is the Founder and CEO of ClearTax)