4 days ago
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
What did the Lok Sabha Select Committee say in the corrigendum?
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corrigendum
What does this mean for taxpayers?
'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 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, 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 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 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:
