Section 424: interest for defaults in payment of advance tax

Introduction

Section 424 addresses non-payment or underpayment of advance tax by a person liable under section 404. It is triggered where no advance tax was paid or advance tax paid is below 90% of the section’s defined assessed tax.

The 1% monthly or part-month interest runs from 1 April following the tax year to the relevant determination or regular assessment date. Later changes to assessed tax can cause a corresponding recomputation.

Key takeaways

When interest applies and the rate - Section 424(1)

"Subject to the other provisions of this section, where, in any tax year, an assessee who is liable to pay advance tax under section 404-- (a) has failed to pay such tax; or (b) the advance tax paid by such assessee under the provisions of section 406 or 407 is less than 90% of the assessed tax, 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, beginning from the 1st April following such tax year-- (i) upto the date of determination of total income under section 270(1); and (ii) upto the date of completion of regular assessment, where a regular assessment is made, on an amount equal to the assessed tax in case where clause (a) is applicable or, on the amount by which the advance tax paid as aforesaid falls short of the assessed tax in case where clause (b) is applicable."

What is 'assessed tax' - Section 424(2)

"Assessed tax" means the tax on the total income determined under Section 270(1), and, where a regular assessment is made, the tax on the total income determined under that regular assessment, reduced by:

• Any tax deducted or collected at source under Chapter XIX-B on income taken into account in computing that total income
• Relief of tax allowed under Section 157
• Relief of tax allowed under Section 159(1) for tax paid in a country outside India
• Relief of tax allowed under Section 159(2) for tax paid in a specified territory outside India
• Deduction from Indian income-tax payable, allowed under Section 160, for tax paid in a country outside India
• Any tax credit allowed to be set off under Section 206(2)(e) to (h) and Section 206(3) and (4)

Regular assessment, part-payment before assessment, and reassessment adjustments

For this section, where an assessment for a tax year is made for the first time under Section 279, it is treated as a regular assessment. Tax on total income under Section 270(1), and under regular assessment, does not include additional income-tax payable under Section 267.

Where, before the date of determination of total income under Section 270(1) or completion of a regular assessment, tax is paid by the assessee under Section 266 or otherwise, interest is calculated up to the date of that payment (reduced by interest already paid under Section 266), and thereafter recalculated on the amount by which the tax paid together with advance tax falls short of the assessed tax.

Where, as a result of an order of reassessment or recomputation under Section 279, the amount on which interest was payable for shortfall in advance tax is increased, the assessee is liable to simple interest at 1% per month for the period from 1 April following the tax year to the date of the reassessment or recomputation, on the amount computed by the formula A = B - C, where A is the increased amount on which interest was payable, B is the tax on total income determined on the basis of the reassessment or recomputation, and C is the tax on total income determined under Section 270(1) or the regular assessment.

Where an order under Section 287, 288, 359, 363, 365(10), 368, 377 or 378 increases or reduces the amount on which interest was payable under Section 424(1) or (3), the interest is increased or reduced accordingly - a fresh demand notice is served (treated as a Section 289 notice) if interest increases, and excess interest paid is refunded if it decreases.

Step-by-step flow for interest under Section 424

1. 1

   Was the assessee liable to pay advance tax under Section 404 for the tax year?

   • No: Section 424 does not apply.
   • Yes: Go to the next step.
2. 2

   Work out the assessed tax

   Tax on total income determined under Section 270(1), or under regular assessment if one is made (a first assessment under Section 279 counts as regular). Exclude additional income-tax under Section 267. Reduce it by tax deducted or collected at source under Chapter XIX-B, relief under Sections 157, 159(1) and 159(2), deduction under Section 160, and tax credit under Section 206(2)(e) to (h), 206(3) and (4).

3. 3

   Did the assessee fail to pay, or pay under Section 406 or 407 less than 90% of the assessed tax?

   • No, paid 90% or more: No interest arises under Section 424(1).
   • Yes: Go to the next step.
4. 4

   Compute interest

   Simple interest at 1% for every month or part of a month, from 1 April following the tax year up to the date of determination under Section 270(1), or completion of regular assessment. The base is the full assessed tax if nothing was paid, or the shortfall of advance tax against assessed tax.

5. 5

   Was tax paid before the determination or assessment (under Section 266 or otherwise)?

   Interest is calculated up to the date of payment and reduced by any interest paid under Section 266 towards this interest; after that, interest runs only on the remaining shortfall (Section 424(4)).

6. 6

   Later changes

   If reassessment or recomputation under Section 279 increases the amount, interest runs from 1 April after the tax year to the date of reassessment on A = B − C (Section 424(5)). Orders listed in Section 424(6) increase or reduce the interest; an increase is demanded by a notice deemed to be under Section 289, and a reduction is refunded.

Practical checklist

Glossary

Assessed tax

The tax amount defined in subsection (2) after the statutory reductions, not simply the unadjusted assessed liability.

Advance-tax shortfall

The amount by which assessed tax exceeds advance tax paid; the below-90% condition determines whether the shortfall rule is triggered.

Frequently asked questions