Section 425 — Interest for deferment of advance tax. Successor to s.234C of the 1961 Act.
Section 425 is in Chapter XIX — Collection and Recovery of Tax, which runs from section 390 to section 430.
Sub-section (1) charges interest for deferment. Where in a tax year an assessee liable to pay advance tax under section 404 — other than an assessee mentioned in sub-section (3) — has failed to pay it, or the advance tax paid on current income on or before a date in column B of the Table is less than the advance tax due on returned income in column C, he is liable to pay interest on the shortfall in column D at the rate in column E. The Table has four entries: 15th June, 15% of the tax due on returned income, at 3%; 15th September, 45%, at 3%; 15th December, 75%, at 3%; and 15th March, 100%, at 1%.
Sub-section (2) is a safe harbour for the first two instalments: no interest is payable under sub-section (1) if the advance tax paid on current income on or before 15th June is 12% or more of the tax due on the returned income, or on or before 15th September is 36% or more of it.
Sub-section (3) deals separately with 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: where such tax has not been paid, or the advance tax paid on current income on or before 15th March is less than the tax due on returned income, simple interest at 1% is payable on the shortfall from the tax due on returned income.
Sub-section (4) removes interest under sub-section (1) or (3) where the shortfall is on account of under-estimating or failing to estimate capital gains, income as per section 2(49)(n), income under the head "Profits and gains of business or profession" accruing or arising for the first time, or dividend income — but only if the assessee has paid in full the tax payable on that income, as if it were part of total income, in any of the remaining instalments of advance tax, if any, or by 31st March of the tax year.
Sub-section (5) defines "tax due on the returned income" as the tax chargeable on the total income declared in the return for the tax year in which the advance tax is paid or payable, reduced by tax deducted or collected at source under Chapter XIX-B on income taken into account in that total income, relief under section 157, relief under section 159(1) for tax paid in a country outside India, relief under section 159(2) for tax paid in a specified territory, deduction under section 160 for tax paid outside India, and — clause (f) as substituted by Act No. 4 of 2026 with effect from 1 April 2026 — any tax credit allowed to be set off as per section 206(2)(e) to (h) and 206(3) and (4). Sub-section (6) gives "dividend" the meaning in section 2(40) but excludes sub-clause (e) of it.
Advance tax is meant to arrive during the year in four tranches, and the section prices the failure to send each tranche on time. The comparison is made against the tax on the income the assessee himself finally returned, so the charge is for deferring a liability he accepts, not for mis-estimating one imposed on him. Sub-sections (2) and (4) then relieve the honest shortfall — a small miss on the first two dates, and income that could not have been foreseen — provided the tax on it is paid by 31 March.
| What | Figure | The condition on it | Where |
|---|---|---|---|
| First instalment threshold | 15% of the tax due on returned income by the 15th day of June | Interest runs on the shortfall till the 15th day of June | Sub-section (1), Table Sl. No. 1, columns B and C |
| Second instalment threshold | 45% of the tax due on returned income by the 15th day of September | Interest runs on the shortfall till the 15th day of September | Sub-section (1), Table Sl. No. 2, columns B and C |
| Third instalment threshold | 75% of the tax due on returned income by the 15th day of December | Interest runs on the shortfall till the 15th day of December | Sub-section (1), Table Sl. No. 3, columns B and C |
| Fourth instalment threshold | 100% of the tax due on returned income by the 15th day of March | Interest runs on the shortfall till the 15th day of March | Sub-section (1), Table Sl. No. 4, columns B and C |
| Rate of interest on the shortfall for the first three instalments | 3% | On the amount of shortfall specified in column D for Sl. Nos. 1, 2 and 3 | Sub-section (1), Table Sl. Nos. 1 to 3, column E |
| Rate of interest on the shortfall for the fourth instalment | 1% | On the amount of shortfall specified in column D for Sl. No. 4 | Sub-section (1), Table Sl. No. 4, column E |
| Safe harbour for the first instalment | 12% or more of the tax due on the returned income | Paid on current income on or before the 15th day of June; no interest under sub-section (1) for that instalment | Sub-section (2)(a) |
| Safe harbour for the second instalment | 36% or more of the tax due on the returned income | Paid on current income on or before the 15th day of September; no interest under sub-section (1) for that instalment | Sub-section (2)(b) |
| Interest for a presumptive declarant | Simple interest at 1% on the shortfall from the tax due on returned income | Where an assessee declaring under section 58(2) (Table: Sl. No. 1 or 3) has not paid, or has paid less than the tax due on returned income, on or before the 15th day of March | Sub-section (3) |
| Last date for paying tax on unforeseen income to escape interest | In any of the remaining instalments of advance tax, if any, or by the 31st day of March of the tax year | Where the shortfall is on account of under-estimation or failure to estimate the four categories of income in sub-section (4)(a) | Sub-section (4)(b) |
The measure throughout is "tax due on the returned income", and sub-section (5) makes that a net figure — tax on the declared total income reduced by tax deducted or collected at source, by section 157, 159(1), 159(2) and 160 relief, and by the credits in clause (f) — so interest is not computed on the gross tax. The safe harbour in sub-section (2) is narrower than the instalment percentages suggest: paying 12% by 15 June and 36% by 15 September removes interest for those two instalments, but nothing softens the 75% and 100% tests on 15 December and 15 March. The relief in sub-section (4) is conditional and the condition is the harder half — the tax on the capital gain, first-time business income, dividend or section 2(49)(n) income must actually be paid in a remaining instalment or by 31 March of the tax year, so an unforeseen December gain still costs interest unless the tax on it is paid by 31 March. A presumptive declarant under section 58(2) (Table: Sl. No. 1 or 3) is outside sub-section (1) and faces one date, 15 March, and simple interest at 1% under sub-section (3). Clause (f) of sub-section (5) was substituted by Act No. 4 of 2026 with effect from 1 April 2026: the credits that reduce the base are now those under section 206(2)(e) to (h) and section 206(3) and (4), the old reference to section 206(1)(m) to (p) having gone with the omission of the company credit clauses.
An assessee's tax due on returned income for a tax year, after the sub-section (5) reductions, is Rs. 10 lakh. He pays Rs. 1 lakh by 15 June. The first Table entry requires Rs. 1.5 lakh, and the sub-section (2)(a) safe harbour requires Rs. 1.2 lakh, so neither is met and interest at 3% runs on the Rs. 50,000 shortfall till 15 June. Had he paid Rs. 1.25 lakh instead — still short of 15% but at least 12% — sub-section (2)(a) would have removed the interest for that instalment altogether.
You meet it as an interest line in an intimation under section 270(1) or in a demand notice after assessment, computed instalment by instalment, and in the self-assessment working where the interest is added before filing.
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; (b) on or before the 15th day of September is 36% or more of the tax due on the 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
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
See the full 1961 to 2025 concordance.
