Interest on Late Filing and Advance Tax Shortfall under the Income Tax Act 2025 (Sections 423, 424, 425)

The Income Tax Act 2025 charges simple interest in three situations: filing the return late (section 423), paying too little advance tax (section 424), and paying advance tax instalments late (section 425). The rate is 1% a month for a late or missing return and for the advance tax default, and 3% or 1% on the shortfall of an instalment for deferment. The Act and the Finance Act, 2026 amendments are the source of every figure below, reviewed on 10 November 2026.

These are separate charges and more than one can apply to the same tax year. The sections are in Chapter "Interest chargeable in certain cases" of the Act. This guide explains each, shows the arithmetic, and ends with a quick reference table. It is general information, not advice on your return.

What are the three interest charges at a glance?

Section	Triggered by	Rate	Interest runs from / to	Charged on
423	Return furnished after the due date, or not furnished	1% x months	Day after due date to date of furnishing (or completion of assessment if no return)	Tax on total income, less tax paid
424	No advance tax paid, or advance tax below 90% of assessed tax	1% per month or part of a month	1 April after the tax year to determination of total income under 270(1) or regular assessment	Assessed tax, or the shortfall from it
425	Instalment paid late or short	3% (June, Sept, Dec), 1% (March)	Fixed for each instalment	Shortfall against that instalment

How is interest for a late income tax return calculated (section 423)?

Section 423(1) gives a formula: I = 1% x A x T. I is the interest, A is the tax on which interest is payable, and T is the number of months in the period that starts the day after the "starting date" and ends on the "ending date". Section 423(2) sets those dates by situation:

Situation (s.423(2) Table)	Starting date	Ending date	Amount A
1. Return furnished late under s.263(1), (4) or (6), or in response to a notice under s.268(1)	Due date under s.263(1)	Date of furnishing the return	Tax on total income (as per s.270(1), or regular assessment if made) less tax paid
2. No return furnished at all	Due date under s.263(1)	Date of completion of regular assessment under s.271	Tax on total income under regular assessment less tax paid
3. Return required by a s.280 notice but filed after the time allowed	Last date allowed under the notice	Date of furnishing the return	Increase in tax from the reassessment or recomputation
4. Return required by a s.280 notice but not filed	Last date allowed under the notice	Date of completion of the reassessment or recomputation under s.279	Increase in tax from the reassessment or recomputation

The statute does not say in section 423 whether a part of a month counts as a full month in T. Section 424 does say "month or part of a month", so the two are worded differently. Check how the department's computation treats a part month in your case before relying on a figure.

What is "tax paid" for this calculation?

Section 423(4)(d) lists it: advance tax paid; TDS and TCS; relief under section 157; foreign tax relief under section 159(1) and (2); the deduction under section 160; and tax credit set off under section 206(2)(e) to (h) and 206(3) and (4). Additional income-tax under section 267 is left out of the amount (s.423(4)(a) and (b)), and interest already paid under section 266 reduces the interest payable (s.423(4)(c)).

When to file is set by section 263(1)(c): 31 July for any other assessee, 31 August for business or profession assessees not under audit, 31 October for companies and audited assessees, and 30 November where section 172 applies. See our guide to who must file and the due dates for the full table.

When is interest charged for not paying advance tax (section 424)?

Advance tax is payable when the tax for the year is Rs 10,000 or more (section 404). Section 424(1) charges simple interest at 1% for every month or part of a month if you either paid none, or paid less than 90% of the assessed tax under sections 406 or 407. The period starts on 1 April following the tax year and ends on the date of determining total income under section 270(1), and again until a regular assessment is completed where one is made.

The amount is the whole assessed tax if you paid nothing, or the shortfall from assessed tax if you paid some but under 90%. "Assessed tax" (s.424(2)) is the tax on total income less TDS/TCS and the reliefs and credits listed there.

If you pay tax before the 270(1) determination, for example as self-assessment tax under section 266, interest runs only up to the date you pay, and then only on whatever shortfall remains (s.424(4)).

What is interest for deferment of advance tax (section 425)?

Even when you pay the full tax by 31 March, being late with the instalments costs interest. Section 425(1) compares what you paid by each date with a share of the "tax due on returned income" (the tax on the income declared in the return, less TDS/TCS and the reliefs in s.425(5)).

Instalment date	Cumulative amount due (of tax on returned income)	Interest on shortfall	No interest if paid by that date
15 June	15%	3%	12% or more (s.425(2)(a))
15 September	45%	3%	36% or more (s.425(2)(b))
15 December	75%	3%	No safe harbour
15 March	100%	1%	No safe harbour

The instalment dates and percentages match section 408(1). An assessee who declares profits under section 58(2) (Table Sl. No. 1 or 3) pays the whole advance tax by 15 March (s.408(2)), and under section 425(3) pays simple interest at 1% on the shortfall from the tax due on returned income.

Which shortfalls escape deferment interest (section 425(4))?

No interest under 425(1) or (3) applies when the shortfall arises because you under-estimated, or failed to estimate, capital gains, income under section 2(49)(n), business or professional income arising for the first time, or dividend income, and you pay in full the tax on that income in a remaining instalment or by 31 March of the tax year. Dividend here follows section 2(40) but excludes sub-clause (e) (s.425(6)).

Worked example 1: late return, tax year 2026-27

Ravi, a salaried employee, has a return due on 31 July 2027 for tax year 2026-27. He files on 30 September 2027. Assumptions: no regular assessment, no section 267 additional tax, and T counted as 2 whole months (August and September).

Step	Working	Rs
1. Tax on total income	As computed in the return	1,80,000
2. Less TDS		1,20,000
3. Less advance tax		20,000
4. Amount A	1,80,000 - 1,20,000 - 20,000	40,000
5. Interest I	1% x 40,000 x 2	800

Under section 266(1), Ravi pays the Rs 40,000 tax and Rs 800 interest (plus any fee due) before filing, and attaches proof of payment. This is only the section 423 interest. His advance tax of Rs 20,000 is below 90% of his assessed tax of Rs 60,000 (tax less TDS), so section 424 interest, and possibly section 425 interest, would be charged separately and is not computed here.

Worked example 2: advance tax below 90%, tax year 2026-27

Meena is a consultant whose assessed tax for 2026-27 (after TDS) is Rs 3,00,000. She paid Rs 2,40,000 as advance tax. She files on time on 31 July 2027 and pays the balance the same day as self-assessment tax. Assumption: assessed tax equals the tax in her return.

Step	Working	Rs
1. 90% of assessed tax	90% x 3,00,000	2,70,000
2. Advance tax paid	Below Rs 2,70,000, so section 424(1)(b) applies	2,40,000
3. Shortfall	3,00,000 - 2,40,000	60,000
4. Months	1 April to 31 July 2027: April, May, June, July	4
5. Interest	1% x 60,000 x 4	2,400

Because she pays the Rs 60,000 on 31 July, interest stops on that date (section 424(4)) and nothing remains to charge afterwards. She pays Rs 62,400 in all. Her return was on time, so section 423 does not apply. Section 425 interest on any late or short instalments is a separate charge and is not included here.

Worked example 3: instalments paid short, tax year 2026-27

Suresh, a trader, has tax on returned income of Rs 4,00,000 after TDS. He is not under section 58(2) and has no exempt-type income in the section 425(4) list. His cumulative payments are in the table.

Date	Required (cumulative)	Paid (cumulative)	Shortfall	Interest
15 June	15% = 60,000	40,000 (10%, below 12%)	20,000	3% = 600
15 Sept	45% = 1,80,000	1,50,000 (37.5%, at least 36%)	30,000	Nil, s.425(2)(b)
15 Dec	75% = 3,00,000	2,80,000	20,000	3% = 600
15 March	100% = 4,00,000	3,90,000	10,000	1% = 100
Total deferment interest				1,300

His total advance tax of Rs 3,90,000 is above 90% of Rs 4,00,000 (Rs 3,60,000), so section 424 does not apply to him. Sections 424 and 425 test different things.

Real-life examples

Kavita never filed. Kavita has business income and ignored a notice. Her regular assessment is completed under section 271 a year later. Section 423 (Sl. No. 2) charges 1% a month on the tax determined less tax paid, from the due date to the date the assessment is completed. Filing late would have stopped the clock on the filing date instead.

Arjun sells shares in February. Arjun's estimate in June, September and December had no capital gains. A February sale creates a large gain. He pays the tax on that gain in full by 15 March. Under section 425(4), no deferment interest arises on the shortfall caused by the gain, because he paid its tax in a remaining instalment.

Sunita gets a reassessment notice. After a notice under section 280, Sunita files the return it requires and her tax goes up. Section 423 Sl. No. 3 and 4 charge interest only on the increase in tax. Under section 424(5), the advance tax interest also applies to the increased amount until the date of reassessment.

Is there interest on a refund that was too high (section 426)?

Interest can also run against you after a refund. If a refund is granted on processing under section 270(1) and regular assessment later finds no refund due, or a smaller one, section 426(1) charges simple interest at 0.5% for every month or part of a month on the whole or excess refund, from the date the refund was granted to the date of regular assessment. If an appeal or revision order later holds the refund correctly allowed, the interest is reduced accordingly (s.426(2)).

Common mistakes

• Assuming a nil-tax-due return means no interest. Interest is on tax after TDS and advance tax. If those cover the tax, A is zero, but check TCS and credits are actually counted.
• Confusing 90% under section 424 with the instalment tests under section 425. Meeting 90% does not remove deferment interest for late instalments.
• Paying advance tax only on 31 March. Section 425 interest still applies on the earlier instalments.
• Filing before paying the balance. Section 266(1) requires tax, interest and fee to be paid first, with proof attached.
• Ignoring the section 425(4) condition. The relief for capital gains and dividends works only if you pay the tax on that income in a later instalment or by 31 March.
• Forgetting that interest already paid under section 266 is credited. Sections 423(4)(c) and 424(4)(a) reduce what is payable.

Quick reference

Item	Rule
Late return interest	1% x A x T, from day after due date to date of furnishing (s.423)
Advance tax liability starts	Tax of Rs 10,000 or more (s.404)
Advance tax default interest	1% per month or part, if paid below 90% of assessed tax (s.424)
Deferment interest	3% on June, Sept, Dec shortfall; 1% on March shortfall (s.425(1))
Safe harbour	12% by 15 June, 36% by 15 September (s.425(2))
Section 58(2) assessees	Whole advance tax by 15 March; 1% on shortfall (s.408(2), s.425(3))
Payment order	Fee first, then interest, then tax (s.266(3))
If an order changes the tax	Interest is increased or reduced; excess interest is refunded (s.423(3), s.424(6))

Where this is in the Act

• Section 423: interest for defaults in furnishing return of income
• Section 424: interest for defaults in payment of advance tax
• Section 425: interest for deferment of advance tax
• Section 426: interest on excess refund
• Section 263(1)(c): due dates for the return
• Sections 404, 406, 407, 408: liability, payment and instalments of advance tax
• Section 266: self-assessment, including payment of interest and fee before filing (see also our guide to self-assessment tax payment and interest)
• Sections 280 and 279: notice for reassessment and the resulting order; see belated and revised return rules

If you know these three charges under their 1961 Act section numbers, check the old-law mapping yourself against the official text before relying on it. This article does not state it.

How can a CA firm keep clients out of interest?

Most interest in practice comes from a missed date: the 15 June instalment, the 31 July return, or a late client document. Finexo's practice management software for CAs tracks these deadlines across a client book and reminds your team and clients before they pass. It does not compute the interest or file returns for you.

For a related read on deductions at source, see TDS on rent under the Income Tax Act 2025.