Hi Vishnu!
The Calculation of Interest done by the Income Tax Department follows the Law laid down Under Section 201(1A) of the Income tax Act 1961. Section 200(1A) currently says that we have to pay interest for late payment at the rate of 1.5%p.m (For delay in number of months from when we were supposed to deposit the tax to the date of actually depositing the tax) & at the rate of 1% from the date we were supposed to deduct tax till the date of actually deducting the tax.
To clarify let me give an example: If we have deducted a sum of Rs. 10,000/- on 15th April, the due date of depositing the tax is 7th May. But if we deposit the tax on August 8th, the number of months of Default will be 4. i.e (May, June, July, August). Therefore Interest will be calculated as follows: 10,000*4*1.5%= Rs. 600/-
Consider an another example . We pay an amount of Rs. 100,000 of Professional charges on 15th May. The date when we were supposed to deduct tax is on 15th May itself (Date of Payment or Credit whichever is earlier) but we deducted tax on 5th September & deposit the tax on 17 th December.
Interest Calculation will be as follows: TDS on Rs. 100,000 @ 10%=10,000/-
10,000*1%*4 ( 4 months of Non Deduction i.e May, June, July, August) = Rs. 400/-
10,000*1.5%*4 (4 months non Payment i.e September, Oct. Nov, Dec) =Rs. 600/-
TOTAL INTEREST = 1000/-
But 1.5% Interest Rates became effective from 1 July 2010. Before it was 1 FOR BOTH
Hence Please find Working Sheet Attached regarding your query for Interest calculation:
You should note that they also compute Interest on Interest. That is interest amount on interest payable till the date of the Default Report.