INTEREST PAYABLE FOR BELATED PAYMENTS UNDER THE NEW INCOME TAX ACT, 2025

The Central Government enacted a new Income Tax Act, 2025 (‘Act’ for short) which has got the assent of the President of India. The provisions of the new Act will come into force with effect from 01.04.2026.

Part E of Chapter XIX of the Act provides for the payment of interest by the assessee for the belated payment of tax etc., from Section 423 to Section 426.

• Section 423 – Interest for default in furnishing the return of income;
• Section 424 – Interest for default for payment of advance tax;
• Section 425 – interest for deferment of advance tax;
• Section 426 – interest on excess refund.

Default in furnishing the return of income

Section 423 (1) of the Act provides that if the return of income for any tax year is furnished after the due date or is not furnished, the assessee shall be liable to pay simple interest as per the given formula-

Interest = 1% x A x T

Where-

A is amount of tax on which interest is payable, as specified in sub-section (2);

T is number of months comprised in the period commencing on the date immediately following the starting date and ending on the end date, both specified in sub-section (2).

Section 403(2) of the Act provides the circumstances under which the interest is payable at the specified rate for the belated time.

• Return to be furnished under Section 263 (1), (4) or (6) or the return filed in response to the notice issued under Section 268(1) after the due date-

• The interest is chargeable for the period from the due date of furnishing the return to the date of filing the return.

• Where a regular assessment is not made, tax on the total income as determined under section 270(1) as reduced by tax paid;
• Where a regular assessment is made, tax on the total income determined under regular assessment as reduced by tax paid.

• If no return has been filed under Section 263 (1), (4) or (6) or in response to the notice issued under Section 268(1) of the Act-

• The interest is chargeable from the due date of furnishing the return to the completion of the assessment under Section 271 (best judgment) of the Act-

• Tax on the total income determined under regular assessment as reduced by tax paid.

• (i) Where return of income is required by a notice under section 280 (escaped assessment) issued after the determination of income under section 270(1) or after the completion of an assessment under section 270(10) or 271 or 279; and

(ii) such return is furnished after the expiry of the time allowed under such notice.

• The interest is chargeable from the last date allowed under the said notice to the date of furnishing the return;

• the tax on the total income determined on the basis of such reassessment or recomputation exceeds the tax on the total income determined under section 270(1) or on the basis of the earlier assessment under the section 270(1) or 271 or 279.

• (i) Where return of income is required by a notice under section 280 issued after the determination of income under section 270(1) or after the completion of an assessment under section 270(10) or 271 or 279; and

(ii) no return is furnished

• The interest is chargeable from the last date of time allowed under the said notice to the date of completion of the reassessment or recomputation under section 279.

• the tax on the total income determined on the basis of such reassessment or recomputation exceeds the tax on the total income determined under section 270(1) or on the basis of the earlier assessment under the section 270(1) or 271 or 279.

Increase or the reduction of interest rate

Section 403(3) of the Act provides that as a result of order under sections-

• 287 – Rectification of mistakes;
• 288 – Other amendments;
• 359 – Order of I Appellate Authority;
• 363 – Orders of Appellate Tribunal;
• 365(10) – Order of a High Court;
• 368 – Order of Supreme Court;
• 377 – Revision of orders prejudicial to the Revenue;
• 378 – Revision of other orders,

the tax is to be increased or reduced the interest shall be increased or reduced accordingly.

If the interest rate is reduced the excess interest paid by the assessee shall be refunded to the assessee.

If the interest rate is on the increase, the Assessing Officer shall serve on the assessee a notice of demand in such form as may be prescribed specifying the sum payable, and such notice of demand shall be deemed to be a notice under section 289 and the provisions of this Act shall apply accordingly.

Total income

The total income, for the purposes of this section-

• as determined under section 270(1) shall not include the additional income-tax, if any, payable under section 267;
• as determined under regular assessment shall not include the additional income-tax payable under section 267.

Tax paid

The expression ‘tax paid’ is defined as-

• advance tax, if any, paid;
• any tax deducted or collected at source;
• any relief of tax allowed under section 157;
• any relief of tax allowed under section 159(1) on account of tax paid in a country outside India;
• 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;
• any deduction, from the Indian income-tax payable, allowed under section 160, on account of tax paid in a country outside India; and
• any tax credit allowed to be set off as per sections 206(1)(m) to (p) and 206(2)(e) to (h).

Default for payment of advance tax

Section 424 of the Act provides that if an assessee who is liable to pay advance tax fails to pay the same or if the advance tax paid is less than 90% of the assessed tax, the assessee is liable to pay interest @ 1% for every month or part of a month, for the period, beginning from 1^st April following such tax year up to the date of determination of total income under section 270(1); and up to the date of completion of regular assessment, where a regular assessment is made.

The expression ‘assessed tax’ is defined as the tax on the total income determined under section 270(1) and where a regular assessment is made, the tax on the total income determined under such regular assessment as reduced by the amount of-

• any tax deducted or collected at source as per 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;
• any relief of tax allowed under section 157;
• any relief of tax allowed under section 159(1) on account of tax paid in a country outside India;
• 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;
• any deduction, from the Indian income-tax payable, allowed under section 160, on account of tax paid in a country outside India; and
• any tax credit allowed to be set off as per sections 206(1)(m) to (p) and 206(2)(e) to (h).

Where, before the date of determination of total income under section 270(1) or completion of a regular assessment, tax is paid by the assessee under section 266 or otherwise,—

• interest shall be calculated as per the foregoing provisions of this section up to the date on which the tax is so paid, and reduced by the interest, if any, paid under section 266 towards the interest chargeable under this section;
• thereafter, interest shall be calculated at the rate aforesaid on the amount by which the tax so paid together with the advance tax paid falls short of the assessed tax.

If as a result of an order of reassessment or recomputation under section 279, the amount on which interest was payable in respect of shortfall in payment of advance tax for any tax year is increased, the assessee shall be liable to pay simple interest at the rate of 1% for every month or part of a month comprised in the period commencing on the 1st April immediately following such tax year and ending on the date of the reassessment or recomputation on such amount determined as per formula below:–

• A =B – C

Where-

A = the increased amount on which interest was payable in respect of shortfall in payment of advance tax for any tax year as a result of reassessment or recomputation;

B = tax on total income determined on the basis of reassessment or recomputation;

C = tax on total income determined under section 270(1) or regular assessment.

For deferment of advance tax

The assessee is liable to pay advance tax as detailed below-

• 15% of the tax on returned income to be paid on or before 15^th June. 3% interest is to be paid for the shortfall of advance tax.
• 45% of the tax on returned income to be paid on or before 15^th September. 3% interest is to be paid for the shortfall of advance tax.
• 75% of the tax on returned income to be paid on or before 15^th December. 3% interest is to be paid for the shortfall of advance tax.
• 100% of the tax on returned income to be paid on or before 15^th March, 2025. 1% interest is to be paid for the short fall of advance tax.

No interest liability

If the advance tax paid-

• on or before 15^th June is more than 12% or more of the tax due;
• on or before 15^th September is more than 36% or more the tax due,

the assessee shall not be liable to pay interest.

No interest shall be liable to pay if the short fall is on account of under estimation or failure to estimate the following income-

• capital gains;
• income as per section 2(49)(n) – (any winnings from lotteries, crossword puzzles, races including horse races, card games and other games of any sort or from gambling or betting of any form or nature).
• income under the head profits and gains of business or profession accruing or arising for the first time;
• dividend income; and

the assessee has paid in full, the tax payable on the said income had such income been part of total income, in any of the remaining instalments of advance tax, if any, or by the 31st day of March of the tax year.

On excess refund

If any amount is refunded to the assessee and no refund is due to the assessee or where the refunded amount is in excess of the eligible amount the assessee shall be liable to pay simple interest at the rate of 0.5% on the whole or the excess amount so refunded, for every month or part of a month comprised in the period from the date of grant of refund to the date of such regular assessment.