Meaning of Assessed Tax for the purpose of section 234B

We regularly face situations where we are required to compute interest under section 234B of the Income tax Act, 1961 (Act). Whereas, the present scenario is that this interest calculation is automatically done in the income tax return (ITR) utility available on the web portal of the Indian Revenue Authorities (IRA), however, it is very important for us to understand section 234B of the Act and its computation without the aid of excel utilities. This article aims to simplify calculation of section 234B and understand the important concept of “Assessed Tax”.

Plain text of section 234B of the Act is as follows:

As it is evident from the plain reading of section 234B of the Act that in order to be able to compute interest under section 234B accurately, it becomes essential to understand the meaning of “Assessed Tax”.

Explanation 1 to section 234B of the Act, explains the meaning of assessed tax as follows:

When interest is charged to a taxpayer under Section 234B?

The two conditions under which interest is charged to a taxpayer under Section 234B:

Delayed Advance Tax Payment: Interest is charged if the taxpayer delays the payment of advance tax, and their tax liability after reducing TDS for the financial year is Rs 10,000 or more.
Insufficient Advance Tax Payment: Interest can also be levied if the taxpayer paid advance tax but the amount paid is less than 90% of the assessed tax liability.

Let us understand computation of section 234B of the Act by this simple illustration:

Suppose the tax liability of an Individual Assessee was Rs 540,000 while tax deducted at source was Rs 340,000.

Advance tax paid was Rs 120,000.

Calculation of Interest:

Tax Liability was Rs 540,000 while TDS was Rs 340,000.

Assessed Tax: Rs 200,000 (540,000- 340,000)

Now for computing interest under section 234B, 90 % of 200,000 shall be computed (and not Rs 540,000)

Rs 200,000* 90% = Rs 180,000

Therefore amount of advance tax paid was less than amount payable by Rs 60,000 (180,000-120,000).

The total interest due will be: Rs 60,000 * 1%* 10 months (April-January) = Rs 6,000.

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