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
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. What did the Lok Sabha Select Committee say in the corrigendum? 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 column
corrigendum Source: CORRIGENDUM What does this mean for taxpayers? ET Wealth Online reached out to CAs to clarify the meaning of this corrigendum, and here's what they said:
Chartered Accountant Prakash Hegde, says: "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%."
Chartered Accountant (Dr.) Suresh Surana says: 'The corrigendum does not imply that the penal interest on advance tax has been tripled across all periods.' Surana explains: '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. 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.'Surana says: Clause 425 of the Bill (corresponding to Section 234C of the IT Act) provides for interest for deferment of advance tax. There are no changes in the interest rate under this clause. The provisions of the existing section have been textually simplified by providing a tabular format to calculate the interest for deferment of advance tax for easy understanding and simple calculation.
The interest rate of 1% per month for a three-month period remains unchanged, but the revised format aims to simplify the process, improving clarity and ease of calculation. In essence, while the underlying interest rate and the basis for its calculation have not altered, the presentation has been simplified for better understanding. This approach retains the core principles of the IT Act, with a focus on ensuring compliance while providing taxpayers with a more user-friendly method of computing their obligations.
Sandeep Jhunjhunwala, Partner, Nangia Andersen LLP, says: Assume your total advance tax liability for the year is Rs 500,000. Under the law, you must pay 15% (Rs 75,000) by 15 June and 45% cumulatively (Rs 225,000) by 15 September. Suppose you pay only Rs 50,000 by 15 June. This results in a shortfall of Rs 25,000 for the June instalment. Interest is calculated at 1% per month for three months on the shortfall, i.e., Rs 25,000 × 1% × 3 months = Rs 750, with the three months running from 16 June to 15 September.By 15 September, your cumulative payment should have reached Rs 225,000, but you have paid only Rs 170,000. This again leaves a shortfall of Rs 55,000. Interest is again charged at 1% per month for three months on this shortfall, i.e., Rs 55,000 × 1% × 3 months = Rs 1,650, for the period 16 September to 15 December. In total, the interest payable for these two shortfalls is Rs 2,400.This illustrates that the '3%' in the provision is simply 1% per month for three months for each instalment shortfall, exactly as under the old Income-tax Act, 1961. In summary, if there is a shortfall in remittance of advance tax even for a day beyond the statutory quarterly due date, interest is charged for a minimum of 3 months.
Mihir Tanna, associate director, S.K Patodia LLP, says: 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.
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