Section 234B of Income Tax Act – Interest on Advance Tax Explained

Summary Points:

1. Section 234B charges 1% interest every month if you fail to pay at least 90% of your total tax before the financial year ends.
    
2. This rule applies to people with a salary and low TDS, freelancers, businesses, and investors who didn’t pay enough tax.
    
3. Interest is charged every month on the unpaid tax amount until the full amount is paid.
    
4. Paying tax on time helps you avoid extra charges, late fees, and worry. With good planning, taxes become easy, and you keep your money safe.

The Indian Income Tax system encourages taxpayers to pay taxes in advance, especially when their annual tax liability exceeds ₹10,000. This is done through advance tax, which must be paid in instalments during the financial year instead of waiting till year-end.

But what happens if you fail to pay enough advance tax or don’t pay it at all? That’s where Section 234B comes into play.

Section 234B of the Income Tax Act imposes interest at 1% per month on the unpaid portion of advance tax. It applies when 90% of the total tax due hasn’t been paid before the end of the financial year.

This provision is especially important for freelancers, start-ups, investors, and those with variable or irregular incomes, who may struggle to accurately estimate and pay advance tax on time.

In this blog, we’ll explain what Section 234B is and how it affects your taxes. You'll also learn how to calculate interest and avoid extra charges by paying tax on time.

What is Section 234B of the Income Tax Act?

Section 234B applies when a taxpayer does not pay advance tax at all or pays less than 90% of the required amount. This interest is charged to ensure fairness, as the government does not want people to delay their payments until the end of the year.

Let’s understand it with the help of an example:

Let’s say Meera Kapoor, a fashion designer in Delhi, had a tax liability of ₹2,50,000 in FY 2024–25. By March, she paid only ₹1,50,000 as advance tax. Since this is less than 90% of her total liability (₹2,25,000), Section 234B applied. 

The shortfall was ₹1,00,000, and she had to pay interest at 1% per month. If she cleared the balance after six months, she paid ₹6,000 as interest (₹1,00,000 × 1% × 6). Her total payment became ₹2,56,000 instead of ₹2,50,000.

Applicability of Section 234B:

Section 234B applies to almost every taxpayer in India if they fail to pay enough advance tax. It covers salaried people, freelancers, small business owners, and investors who earn through capital gains or other sources.

The basic rule is: if the advance tax paid is less than 90% of the final tax liability, Section 234B applies.

Let’s understand it with the help of an example:

Let’s say Arjun Malhotra, a 42-year-old freelancer in Pune, had an income of ₹18,00,000 in FY 2024–25. His tax liability was ₹2,40,000. However, he paid only ₹1,00,000 as advance tax before March 2025. Since 90% of ₹2,40,000 is ₹2,16,000, Arjun fell short by ₹1,16,000. 

Section 234B charged him interest of 1% per month on the shortfall. If he paid after three months, his interest burden was ₹3,480 (₹1,16,000 × 1% × 3).

Section 234B applies to a wide range of taxpayers in India whenever there is a shortfall in advance tax payment. For salaried employees, it does not apply if the employer deducts the entire TDS correctly. However, if the TDS is deducted partially or not fully, Section 234B becomes applicable. 

Freelancers and business owners are covered if their advance tax payment falls short by more than 10% of their total liability. Similarly, investors earning through capital gains also come under its scope if they fail to pay sufficient advance tax. This makes Section 234B relevant to most taxpayers, highlighting the importance of accurate and timely tax payments.

Interest Rate under Section 234B:

The Income Tax Department charges interest at a fixed rate of 1% per month or part of a month on the unpaid amount. It is simple interest, not compound, which means the calculation is straightforward.

Let’s understand it with the help of an example:

Neha Verma, a small business owner in Jaipur, had a total tax liability of ₹4,00,000 for FY 2024–25. She paid only ₹3,00,000 as advance tax. This left a shortfall of ₹1,00,000. Under Section 234B, she had to pay 1% per month as interest on the shortfall. 

If she cleared the balance after five months, her interest became ₹5,000 (₹1,00,000 × 1% × 5). So, instead of ₹4,00,000, her total payment rose to ₹4,05,000.

Interest Calculation under Section 234B

The table below shows how interest grows with a delay in payment:
 

The table makes it clear that even a few months’ delay can add thousands of rupees to the tax bill.

How to Calculate Interest under Section 234B?

The calculation of interest under Section 234B is very simple. The formula is:

Interest = 1% × (Tax payable – Advance tax paid) × Number of months

This helps the government recover money for late or short payments of advance tax.

Let’s understand it with the help of an example:

Let’s say Karan Mehta, a software consultant in Gurugram, had a tax liability of ₹3,60,000 in FY 2024–25. He paid only ₹2,40,000 as advance tax before March. The shortfall was ₹1,20,000. He paid the balance in September, i.e., six months later. Under Section 234B, his interest was:

1% × ₹1,20,000 × 6 = ₹7,200.

So instead of ₹3,60,000, he paid ₹3,67,200.

Step-by-Step Calculation of Section 234B Interest

Before looking at other sections, let’s break down the steps:
 

The step-by-step method ensures taxpayers can easily calculate their own liability without confusion.

Conclusion:

Section 234B applies when you don’t pay at least 90% of your total tax before the financial year ends. It affects freelancers, businesses, investors, and salaried individuals with incomplete TDS. You’re charged 1% interest monthly on the shortfall. However, if your tax liability is under ₹10,000 or full TDS is deducted by your employer, you’re exempt. Timely planning helps avoid stress and extra charges.

FAQs:
 

Q1: How can I avoid interest under Section 234B or 234C?

You can avoid interest by paying advance tax on time and ensuring that at least 90% of your tax is paid.

Q2: What is Section 234B in case of an updated return?

Interest under Section 234B is charged on the assessed tax or shortfall, as per Section 140B, when filing an updated return.

Q3: What is the overdue interest amount?
It is the interest charged on any loan amount not paid by its due date as per the agreed terms.

Q4: What are the circumstances for a best judgment assessment?

It occurs when a taxpayer fails to file returns or provide required documents, leading authorities to assess tax based on available information.

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LoansJagat Team

‘Simplify Finance for Everyone.’ This is the common goal of our team, as we try to explain any topic with relatable examples. From personal to business finance, managing EMIs to becoming debt-free, we do extensive research on each and every parameter, so you don’t have to. Scroll up and have a look at what 15+ years of experience in the BFSI sector looks like.