Income Tax 2025

Appearance

Interest for deferment of advance tax. ​

425(1) ​

If an assessee, liable to pay advance tax under section 404, other than the assessee mentioned in sub-section (3), has failed to pay such tax, or the advance tax paid by the assessee on its current income on or before the date specified in column B of the Table below, is less than advance tax due on returned income, as specified in column C, then the assessee shall be liable to pay interest on the amount of shortfall of advance tax as specified in column D , at the rate of interest specified in column E: --Table--

425(2) ​

The assessee shall not be liable to pay any interest under sub-section (1), if the advance tax paid by the assessee on the current income,––

  • (a) on or before the 15th day of June is 12% or more of the tax due on the returned income; or
  • (b) on or before the 15th day of September is 36% or more of the tax due on the returned income.

425(3) ​

An assessee who declares profits and gains as per section 58(2) (Table: Sl. No. 1 or 3) or, who is liable to pay advance tax under section 404, has failed to pay such tax, or the advance tax paid by the assessee on its current income on or before the 15th day of March is less than the tax due on returned income, shall be liable to pay simple interest at the rate of 1% on the amount of shortfall from the tax due on returned income..

425(4) ​

No interest shall be payable under sub-section (1) or (3) in respect of shortfall in the payment of tax due on returned income, where,––

  • (a) the shortfall is on account of underestimation or failure to estimate the following incomes:–– (i) capital gains; (ii) income as per section 2(49)(n); (iii) income under the head profits and gains of business or profession accruing or arising for the first time; (iv) dividend income; and
  • (b) the assessee has paid in full, the tax payable on the incomes referred to in clause (a), in any of the remaining instalments of advance tax, if any, or by the 31st day of March of the tax year.

425(5) ​

For the purposes of this section “tax due on the returned income” means the tax chargeable on the total income declared in the return of income furnished by the assessee for the tax year in which the advance tax is paid or payable, as reduced by the amount of—

  • (a) any tax deducted or collected at source as per the provisions of Chapter XIX-B on any income which is subject to such deduction or collection and which is taken into account in computing such total income;
  • (b) any relief of tax allowed under section 157;
  • (c) any relief of tax allowed under section 159(1) on account of tax paid in a country outside India;
  • (d) any relief of tax allowed under section 159(2) on account of tax paid in a specified territory outside India referred to in that section;
  • (e) any deduction, from the Indian income-tax payable, allowed under section 160, on account of tax paid in a country outside India; and
  • (f) any tax credit allowed to be set off as per section 206(13).
Explanation

Section Summary: ​

Section 425 of the new income tax law deals with the interest payable by taxpayers for deferring or underpaying advance tax. Advance tax is the tax paid in instalments during the financial year, based on estimated income. If a taxpayer fails to pay the required advance tax or pays less than the due amount, they are liable to pay interest on the shortfall. The section specifies the conditions under which interest is applicable, the rates of interest, and exceptions where no interest is charged.

Key Changes: ​

  1. Interest on Shortfall of Advance Tax: The section introduces a structured approach to calculate interest on the shortfall of advance tax payments. The interest is calculated based on the amount of shortfall and the time period of the delay.
  2. Thresholds for Avoiding Interest: Sub-section (2) provides specific thresholds (12% by June 15 and 36% by September 15) to avoid interest liability. If these thresholds are met, no interest is charged.
  3. Special Provisions for Certain Incomes: Sub-section (4) exempts interest on shortfalls caused by underestimating specific incomes (e.g., capital gains, dividend income) if the tax on such incomes is paid in full by March 31.
  4. Definition of "Tax Due on Returned Income": Sub-section (5) clarifies how to calculate the "tax due on returned income" by adjusting for TDS, tax reliefs, and foreign tax credits.

Practical Implications: ​

  1. For Taxpayers:

    • Taxpayers must ensure timely payment of advance tax instalments to avoid interest charges.
    • If certain incomes (e.g., capital gains) are underestimated, taxpayers can avoid interest by paying the full tax on such incomes by March 31.
    • Meeting the thresholds (12% by June 15 and 36% by September 15) can help avoid interest liability.

  2. For Businesses:

    • Businesses with fluctuating incomes (e.g., those with unexpected capital gains or dividend income) need to carefully estimate their advance tax liabilities to avoid penalties.
    • Proper documentation and timely adjustments for TDS, tax reliefs, and foreign tax credits are essential to calculate the correct "tax due on returned income."

  3. For Compliance:

    • Taxpayers must monitor their advance tax payments and ensure they meet the required thresholds.
    • Accurate estimation of income, especially for unpredictable incomes, is critical to avoid interest charges.

Critical Concepts: ​

  1. Advance Tax: Tax paid in instalments during the financial year based on estimated income.
  2. Tax Due on Returned Income: The total tax liability calculated on the income declared in the tax return, adjusted for TDS, tax reliefs, and foreign tax credits.
  3. Shortfall of Advance Tax: The difference between the advance tax paid and the advance tax due.
  4. Interest Rates: The interest rate for shortfall is specified in the table under sub-section (1). For certain cases under sub-section (3), the interest rate is 1% per month.

Compliance Steps: ​

  1. Estimate Income Accurately: Taxpayers should estimate their income for the year, including unpredictable incomes like capital gains or dividends.
  2. Pay Advance Tax Instalments: Ensure advance tax is paid in the required instalments by the due dates (June 15, September 15, December 15, and March 15).
  3. Monitor Thresholds: Pay at least 12% of the tax due by June 15 and 36% by September 15 to avoid interest under sub-section (2).
  4. Adjust for TDS and Reliefs: Calculate "tax due on returned income" by adjusting for TDS, tax reliefs, and foreign tax credits.
  5. Pay Tax on Unpredictable Incomes: If certain incomes (e.g., capital gains) are underestimated, ensure the full tax on such incomes is paid by March 31 to avoid interest under sub-section (4).

Examples: ​

  1. Example 1: Meeting Thresholds:

    • A taxpayer estimates their annual tax liability at ₹1,00,000.
    • They pay ₹12,000 (12%) by June 15 and ₹36,000 (36%) by September 15.
    • No interest is charged under sub-section (2), even if the remaining tax is paid later.

  2. Example 2: Underestimating Capital Gains:

    • A taxpayer underestimates capital gains and pays less advance tax.
    • They realize the mistake and pay the full tax on capital gains by March 31.
    • No interest is charged under sub-section (4).

  3. Example 3: Shortfall in Advance Tax:

    • A taxpayer pays only ₹20,000 by September 15 against a required ₹36,000.
    • The shortfall of ₹16,000 attracts interest under sub-section (1) until the tax is paid.

By following these guidelines, taxpayers can avoid unnecessary interest charges and ensure compliance with the new income tax law.