Finmin clears the air: Advance tax penal interest stays at 3%, no increase

Business Standard

a day ago

In a welcome relief for taxpayers, the Finance Ministry on Tuesday issued a corrigendum to correct a drafting error in the newly introduced Income Tax Bill, 2025. The amendment clarifies that penal interest on shortfalls in advance tax payments remains unchanged at 3% per quarter (1% per month for three months). Previous confusion had sparked concern that the interest rate was increased to 3% per month.
Taxpayers with an annual tax liability of ₹10,000 or more must pay advance tax in four instalments — on June 15, September 15, December 15, and March 15. Senior citizens without business income are generally exempt from this rule.
The corrigendum matters for those who miss these deadlines or pay less than the required instalment, as the resulting interest charges can quickly become substantial.
What the Drafting Error Said
The draft clause (Clause 425) in the newly tabled Income Tax Bill incorrectly specified interest of 1% per month or part of a month on the shortfall in advance tax payments.
Though seemingly benign, this change implied a maximum monthly interest of 1% for every month delayed, prompting concerns the rate might effectively rise to 3% monthly.
What the Corrigendum Fixes
The updated wording restores the original intent under Section 234C of the Income Tax Act, 1961:
3% per instalment (charged once for up to three months) when the taxpayer misses deadlines on June 15, September 15, or December 15 instalments.
1% interest applies only to the March 15 instalment.
'Interest is charged for a minimum of three months even if there is a delay of a single day beyond the due date,' as per Sandeep Jhunjhunwala, Partner, Nangia Andersen LLP.
Why It Matters for Taxpayers
No increased burden: The corrigendum ensures the tax regime remains exactly as it was—1% interest for each delayed instalment, translating to a 3% penalty for quarterly defaulters, not a punitive 3% monthly charge.
Maintained clarity: The simplified tabular presentation clarifies the structure, reducing calculation errors or misinterpretations.
Calculation in Practice
If you owe ₹5 lakh in advance tax:
By June 15, ₹75,000 is due. If you pay only ₹50,000, there's a shortfall of ₹25,000. You owe ₹750 interest (₹25,000 × 1% × 3 months).
If by September 15 you've paid ₹1.70 lakh (short ₹55,000), interest is ₹1,650 for the next quarter.
Total due: ₹2,400 in interest—exactly what the old law required.
Bottom Line for You
No change in the financial impact of missing deadlines—just better clarity in the law's wording.
If you pay advance tax a day late, you're liable for the full 3% penalty per instalment, not a cumulative monthly charge.
The correction reduces uncertainty, ensuring taxpayers avoid unintended overpayments and calculation errors.
Lok Sabha passes revised new I-T Bill 2025
The Lok Sabha, on August 11, passed the modified new Income-Tax Bill, 2025 and the Taxation Laws (Amendment) Bill, 2025, shortly after Finance Minister Nirmala Sitharaman tabled the revised version in Parliament. Now, the Bill must be passed by the Rajya Sabha to replace the current Act, and then it will seek the President's nod. Once enacted, the new I-T Bill will replace the archaic six-decade-old income tax law.
"The biggest advantage of the new law is that a common man may easily understand it with lesser efforts as compared to the old law. The revised bill has incorporated most of the changes recommended by the Select Committee. The new regime announced in Budget 2025 will remain in the new Bill and the tax-payers still have to undergo the process of assessing the right regime to follow while filing tax return. Similarly, no changes are proposed in tax rates as introduced in Budget 2025," said Preeti Sharma, Partner, Global Employer Services, Tax & Regulatory Services, BDO India