Income Tax Act 2025: Section 425 for Tax Year 2026-27

Interest for deferment of advance tax

[Section-425 as per the Income Tax Act, 2025 (this Act) w.e.f. 1st April, 2026.]

Section 425(1) of Income Tax Act 2025

425(1) If 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 E:

Table

Section 425(2) of Income Tax Act 2025

425(2) The assessee shall not be liable to pay any interest under sub-section (1), if the advance tax paid by the assessee on the current income,––

• 425(2)(a) on or before the 15th day of June is 12% or more of the tax due on the returned income; or
• 425(2)(b) on or before the 15th day of September is 36% or more of the tax due on the returned income.

Section 425(3) of Income Tax Act 2025

425(3) 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, has failed to pay such tax, or the advance tax paid by the assessee on its current income on or before the 15th day of March is less than the tax due on 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.

Section 425(4) of Income Tax Act 2025

425(4) No interest shall be payable under sub-section (1) or (3) in respect of shortfall in the payment of tax due on returned income, where,––

• 425(4)(a) the shortfall is on account of underestimation or failure to estimate the following incomes:––
  • (i) capital gains;
  • (ii) income as per section 2(49)(n);
  • (iii) income under the head profits and gains of business or profession accruing or arising for the first time;
  • (iv) dividend income; and
• 425(4)(b) the assessee has paid in full, the tax payable on the incomes referred to in clause (a), in any of the remaining instalments of advance tax, if any, or by the 31st day of March of the tax year.

Section 425(5) of Income Tax Act 2025

425(5) For the purposes of this section “tax due on the returned income” means the tax chargeable on the total income declared in the return of income furnished by the assessee for the tax year in which the advance tax is paid or payable, as reduced by the amount of—

425(5)(a) any tax deducted or collected at source as per the provisions of Chapter XIX-B on any income which is subject to such deduction or collection and which is taken into account in computing such total income;

• 425(5)(b) any relief of tax allowed under section 157;
• 425(5)(c) any relief of tax allowed under section 159(1) on account of tax paid in a country outside India;
• 425(5)(d) any relief of tax allowed under section 159(2) on account of tax paid in a specified territory outside India referred to in that section;
• 425(5)(e) any deduction, from the Indian income-tax payable, allowed under section 160, on account of tax paid in a country outside India; and
• 425(5)(f) any tax credit allowed to be set off as per section 206(13).

FAQs on Section 425 of Income Tax Act 2025

Who is liable to pay interest for deferment of advance tax under section 425(1) of the Income Tax Act, 2025?
Any assessee (except those referred to in section 425(3)) who is liable to pay advance tax under section 404 and either fails to pay it or pays less than the specified percentage of advance tax due on returned income by the due dates shall be liable to pay interest on the shortfall.

What are the due dates and corresponding interest for deferment of advance tax under section 425(1)?
The interest is calculated as follows:

• By 15th June: 15% of tax due should be paid; 3% interest on shortfall.
• By 15th September: 45% of tax due should be paid; 3% interest on shortfall.
• By 15th December: 75% of tax due should be paid; 3% interest on shortfall.
• By 15th March: 100% of tax due should be paid; 1% interest on shortfall.

Can an assessee be exempted from interest under section 425(1)?
Yes, if advance tax paid is at least 12% by 15th June or 36% by 15th September of the tax due on returned income, no interest is payable under section 425(1).

What is the rate of interest charged for shortfall under section 425(1)?
The rate of interest is 3% for shortfalls up to the 15th June, 15th September, and 15th December milestones, and 1% for shortfall as of 15th March.

Who is covered under section 425(3)?
Assessees who declare profits and gains as per section 58(2), Table Sl. No. 1 or 3, or who are liable to pay advance tax under section 404 and have short-paid advance tax by 15th March are covered under section 425(3).

What is the interest rate under section 425(3)?
Simple interest at the rate of 1% on the amount of shortfall from the tax due on returned income.

Is there any exemption from interest under section 425(1) or 425(3) for certain incomes?
Yes. No interest is payable if the shortfall is due to underestimation or failure to estimate the following incomes:
(i) Capital gains
(ii) Income under section 2(49)(n)
(iii) First-time business/profession income
(iv) Dividend income
And the tax on such incomes is paid in full by 31st March or in the remaining instalments.

How is ‘tax due on the returned income’ computed for interest calculation?
It is the tax chargeable on the total income declared in the return of income, reduced by:
(a) TDS/TCS under Chapter XIX-B
(b) Relief under section 157
(c) Relief under section 159(1) and 159(2) for tax paid abroad
(d) Deduction under section 160
(e) Tax credit under section 206(13)

Does section 425 apply to assessees who are not liable to pay advance tax under section 404?
No, section 425 applies only to those assessees who are liable to pay advance tax under section 404.

Is interest under section 425 automatic or subject to discretion?
Interest under section 425 is mandatory and automatic upon shortfall in advance tax as per the conditions laid out.

Is partial payment of advance tax sufficient to avoid interest?
Partial payment may be sufficient only if it meets or exceeds the threshold percentages (12%, 36%) as prescribed in section 425(2). Otherwise, interest applies on the shortfall.

Can an assessee reduce the interest liability by paying the shortfall in later instalments?
Yes, especially under section 425(4), if the shortfall is due to specified unforeseen incomes and full tax is paid in the remaining instalments or by 31st March, interest may not apply.