Has the penal interest increased from 1% to 3% on advance tax payment in the new income tax bill 2025? Here's what CAs say
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'Under the original draft of the Income-tax Bill, 2025, the interest for shortfall in payment of advance tax was prescribed at 1% per month, similar to the provisions of section 234C of the current Income-tax Act, 1961.
The corrigendum replaces this with a revised table, whereby for instance, the interest on shortfall in advance taxes for the first three installments, i.e., those due on 15th June, 15th September and 15th December, is levied at a flat rate of 3% for the respective period of shortfall in advance taxes.
The interest on shortfall for the last instalment due on 15th March remains at 1%. It is important to note that the 3% is a one-time levy for the relevant instalment period and not a monthly rate.
In the Income Tax (no.2) Bill 2025 introduced in Lok Sabha, Section 425 specifies the provisions for interest liability in the case specified taxpayer failed to pay advance tax. To make it easy to understand, provisions of existing Sec 234C of Income Tax Act 1961 are simplified and presented in tabular form.
Also the word "....Interest at the rate of one percent per month...." is presented as "3%" Interest payable on shortfall. Thus, it can be observed that there is no change in the provisions. Earlier also if the taxpayer doesn't pay advance tax on or before the specified due date, he/she was liable for interest for 1%*3 months.
For example, a person has earned business income today on 12th August and didn't pay advance tax on the last due date (i.e. 15th June); in that case the taxpayer is liable for interest for the entire 3 months (i.e. July to Sep). If the taxpayer pay advance tax today on 12th August or any time before 15th Sep; taxpayer will not be liable for interest for 3 months (i.e. October to December).
Further, relief is provided for income which can not be estimated in advance like capital gain, dividend etc. For such income, interest will not be applicable if advance tax is paid in the subsequent due date of advance.
The Lok Sabha Select Committee recommended correcting a drafting error regarding how interest is calculated for shortfalls in advance tax payments. The revised Income Tax Bill 2025 that was introduced in the parliament yesterday (August 11, 2025) had a drafting error that stated:'the assessee shall be liable to pay simple interest at the rate of 1% for every month or part of a month, for the period….'.The select committee proposed that the penal interest for these shortfalls should be set at 3% for the first three installments and then drop to 1% for the final installment.So essentially there is no change to the advance tax shortfall interest law as outlined in the Income Tax Act, 1961 and New Income Tax Bill, 2025.As per the Lok Sabha Select Committee Corrigendum, this is what the select committee said:Page 447, for lines 18 to 42, —substitute—'425. (1)Where in any tax year, 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 columnSource: CORRIGENDUMET Wealth Online reached out to CAs to clarify the meaning of this corrigendum, and here's what they said:"Under section 234C of the Income Tax Act, 1961 , the taxpayer who delays the payment of Advance Tax due for the first three instalments (i.e. instalments which are due on 15th June, 15th September and 15th December) even by a single day, is required to pay interest for 3 months i.e. 3% of the amount of Advance Tax due for that instalment. The interest remains at 3% even if the Advance Tax due for an earlier instalment is paid on or before the next instalment.In the Income Tax (No. 2) Bill, 2025, in Clause 425, for the first three instalments it was mentioned that the 'interest shall be chargeable at 1% per month for 3 months, or the period of default, whichever is less' which means that a taxpayer would pay interest only for the period of default. This means that interest payable could be 1% or 2% or 3% depending on the date of actual payment.This would have helped the taxpayer to pay a lesser amount of interest if he pays early which was justifiable and equitable. However, now through the Corrigendum dated 11 August 2025, Clause 425 has been substituted to make the rate of interest exactly in line with the Act, i.e. regardless of the date of payment of the Advance Tax due for the first 3 instalments, if there has been any delay even by a day, the interest payable shall be 3%."'The corrigendum does not imply that the penal interest on advance tax has been tripled across all periods.'Surana explains:Surana says: 'Thus, while the original Bill prescribed a simple interest of 1% per month for each quarter on the shortfall in advance tax , the corrigendum consolidated this into a flat levy of 3% for the quarterly installments,which equates to the same overall interest cost for the respective relevant quarter. Accordingly, there is no substantive change in the effective interest burden; the amendment is primarily a change in the manner of computation and presentation.'Mihir Tanna, associate director, S.K Patodia LLP, says:
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The Bombay High Court has taken a gender-sensitive stance, acknowledging the legitimacy of adding family members' names to property titles for pragmatic reasons which is a common practice in Indian families. Aditya Chopra, Managing Partner, The Victoriam Legalis (TVL) says: This judgment significantly administers safeguards against arbitrary reassessments under Section 148 of the Income Tax Act, 1961, by insisting on tangible evidence of income escapement rather than mere assumptions from joint property ownership. It clarifies that nominal joint owners, such as non-contributing housewives in family transactions, cannot face reassessment if documentary proof (e.g., bank statements) showing no financial involvement, thereby protecting vulnerable individuals from undue tax scrutiny. Building on the precedent of Kalpita Arun Lanjekar (2024), this may contribute towards reducing litigation in similar cases involving high-value assets flagged via automated systems. Administratively, it urges the Income Tax Department to differentiate between actual payers and nominal holders, curbing redundant notices and promoting fairer enforcement. Alay Razvi, Managing Partner, Accord Juris, says: It has been held that to clearly record in the sale deed or a separate declaration that the non-contributing owner has no beneficial interest and made no payment. All payments should be from the paying party's bank account with receipts, bank statements, and proof of fund source. Gift Deed to be executed (if treated as a gift) or a sworn affidavit confirming the true funding source. One can disclose in their ITR as Joint Ownership clarifying funding to pre-empt scrutiny. If asked, promptly submit sale deeds, bank statements, and supporting documents of the paying party. Significance of the Judgment: The Income Tax Department must verify the source of funds from the actual payer, not a nominal joint owner. Prevents unwarranted reassessment of spouses or relatives added only for convenience. Along with Kalpita Arun Lanjekar, forms strong authority to quash arbitrary Section 148 notices in similar cases. Limits the scope for misuse of reassessment powers without genuine 'reason to believe.' Encourages taxpayers to document and disclose real ownership and payment sources to avoid disputes. CA (Dr.) Suresh Surana, says: This recent judgment carries significant implications in the realm of tax law, particularly concerning joint property ownership and the scope of reassessment under Section 148 of the Income Tax Act. It not only addresses the rights of individuals who are co-owners in name but not in financial contribution but also reinforces the procedural safeguards that tax authorities must observe. The ruling provides much-needed clarity, and sets a precedent for similar future cases, and strengthens the framework for fair and evidence-based tax assessments. Below are the key takeaways that highlight the broader impact of this decision:1. Clarification on Joint Property Ownership: It clarifies the legal situation where there are multiple joint owners of a property who did not contribute to the purchase. The court acknowledged that just being a co-owner for convenience does not justify reassessment under Section 148 of the Income Tax Act if the person did not contribute to buying the property. The ruling offers protection for people who might co-own a property but aren't part of its funding or financing. It ensures that these won't be unjustly targeted in tax issues just because their name appears on property documents.2. Reinforcement of Proper Reassessment Procedures: The judgment reiterates the importance of having legitimate reasons to issue reassessment notices under Section 148. Tax authorities cannot issue such notices based on vague assumptions, without evidence that the income has actually escaped assessment. This ruling could set a significant precedent for similar situations where people are mistakenly assessed or targeted due to their name is listed on a property deed, even if they have no financial stake. It reinforces the principle that tax assessments must be based on factual and verifiable evidence, not assumptions. The judgment guides tax authorities to carefully examine the reasons for revisiting assessments and highlights that baseless allegation of income tax evasion will not be upheld in court.
