Chapter XIX - Collection and Recovery of Tax
Section 425
Section 425: interest for deferment of advance tax
Section 425 charges interest where an assessee pays less than the required cumulative percentage of advance tax by each of the four instalment due dates during the tax year, even if the assessee eventually pays the full amount by year end.
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This article is for general information. Refer to the Income-tax Act, 2025 as amended by the Finance Act, 2026 and the Taxation and Other Laws (Amendment) Act, 2026 for the official provisions. If you need professional advice for your situation, contact Bizeneed.
Statutory text
Bare law
(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 E:—
| Sl. No. | Due date of Instalment | Advance tax due on returned income | Amount of Shortfall of advance tax being advance tax due as per column C, as reduced by advance tax already paid on or before the date specified in column B | Interest payable on shortfall as specified in column D |
|---|---|---|---|---|
| 1 | 15th day of June | 15% of the tax due on returned income. | Shortfall till 15th day of June | 3% |
| 2 | 15th day of September. | 45% of the tax due on returned income. | Shortfall till 15th day of September | 3% |
| 3 | 15th day of December. | 75% of the tax due on returned income. | Shortfall till 15th day of December | 3% |
| 4 | 15th day of March. | 100% of the tax due on returned income. | Shortfall till 15th day of March | 1%. |
(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,— (a) on or before the 15th day of June is 12% or more of the tax due on the returned income; (b) on or before the 15th day of September is 36% or more of the tax due on the returned income.
(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.
(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,— (a) the shortfall is on account of under estimation of, or failure to estimate the following income:— (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(b) the assessee has paid in full, the tax payable on the said income had such income been part of total income, in any of the remaining instalments of advance tax, if any, or by the 31st day of March of the tax year.
(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— (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; (b) any relief of tax allowed under section 157; (c) any relief of tax allowed under section 159(1) on account of tax paid in a country outside India; (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; (e) any deduction, from the Indian income-tax payable, allowed under section 160, on account of tax paid in a country outside India; and (f) any tax credit allowed to be set off as per section 206(2)(e) to (h)and 206(3) and (4).
(6) For the purposes of this sub-section, the expression “dividend” shall have the meaning assigned to it in section 2(40), but shall not include sub-clause (e) thereof.
Introduction
Section 425 tests advance-tax instalments against the due-on-return percentages at each statutory date. It charges interest on a specified shortfall, while including tolerance rules for the first two dates and a separate rule for the named presumptive-income cases.
Subsection (4) addresses under-estimation or failure to estimate specified income. It requires the related tax to be paid in full in a remaining advance-tax instalment, if any, or by 31 March; it does not expressly require that income to arise after an instalment date.
Key takeaways
Instalment shortfall
The section compares advance tax paid by each relevant instalment date with the percentage of tax due on returned income in its table.
Separate presumptive case
Subsection (3) provides a different rule for the named section 58(2) presumptive-income assessees.
Specified income exception
A conditional exception covers under-estimation or failure to estimate the listed income, where the related tax is paid within the statutory payment window.
The instalment table - Section 425(1)
Where an assessee liable to pay advance tax (other than an assessee covered by Section 425(3)) has failed to pay it, or has paid less than the percentage due by each instalment date, interest is charged on the shortfall as per this table:
| Instalment due date | Advance tax due on returned income | Shortfall period | Interest rate |
|---|---|---|---|
| 15th day of June | 15% of the tax due on returned income | Shortfall till 15th day of June | 3% |
| 15th day of September | 45% of the tax due on returned income | Shortfall till 15th day of September | 3% |
| 15th day of December | 75% of the tax due on returned income | Shortfall till 15th day of December | 3% |
| 15th day of March | 100% of the tax due on returned income | Shortfall till 15th day of March | 1% |
Safe-harbour thresholds - Section 425(2)
No interest is payable under Section 425(1) if the advance tax paid on current income:
- On or before the 15th day of June is 12% or more of the tax due on the returned income
- On or before the 15th day of September is 36% or more of the tax due on the returned income
Presumptive-income taxpayers - Section 425(3)
Subsection (3) names assessees declaring profits and gains under section 58(2) (Table: Sl. No. 1 or 3). Its stated calculation is simple interest at 1% on the shortfall from tax due on returned income where the required advance tax is unpaid or the amount paid by 15 March is insufficient. Read the complete statutory wording above when identifying the applicable category.
Exception for specified income not fully estimated — Section 425(4)
No interest is payable under Section 425(1) or (3) for a shortfall attributable to under-estimation of, or failure to estimate, the following, provided the assessee pays the tax on that income in full in a remaining advance tax instalment (or by 31 March of the tax year):
- Capital gains
- Income referred to in Section 2(49)(n)
- Income under the head profits and gains of business or profession, accruing or arising for the first time
- Dividend income
Meaning of 'tax due on the returned income' and 'dividend'
"Tax due on the returned income" means the tax chargeable on the total income declared in the return for the tax year in which advance tax is paid or payable, reduced by: tax deducted or collected at source under Chapter XIX-B; relief under Section 157; relief under Section 159(1) or (2) for tax paid outside India; deduction under Section 160 for tax paid outside India; and any tax credit allowed to be set off under Section 206(2)(e) to (h) and Section 206(3) and (4).
For Section 425(4), "dividend" has the meaning assigned in Section 2(40), but excludes sub-clause (e) of that definition.
Step-by-step flow for applying Section 425
- 1
Are you liable to advance tax under Section 404?
- No: No Section 425 interest.
- Yes: Go to the next step.
- 2
Presumptive assessee under Section 58(2) Sl. No. 1 or 3?
- Yes: 1% interest on any shortfall against tax due on returned income as at 15 March (Section 425(3)).
- No: Use the instalment Table in Section 425(1).
- 3
Compare cumulative payment with 15%, 45%, 75% and 100% of tax due on returned income at each date
No interest for June if at least 12% was paid, and for September if at least 36% was paid (Section 425(2)).
- 4
Is the shortfall due to capital gains, first-time business income, dividends or income under Section 2(49)(n)?
If the tax on that income was paid in full in the remaining instalments or by 31 March, no interest arises for that shortfall (Section 425(4)).
Practical checklist
Do
- Determine tax due on returned income and the advance tax actually paid by each instalment date.
- Compare the cumulative paid amount with the table percentage and check the June and September tolerance conditions.
- Apply the separate subsection (3) rule where the assessee is within its named presumptive-income category.
- For a claimed subsection (4) exception, identify the listed income that was not fully estimated and document payment of the related tax within the statutory window.
Avoid
- Do not calculate each instalment shortfall from only the payment made that day; the table compares cumulative advance tax paid by that date.
- Do not assume the specified-income exception applies without meeting its income-category and payment conditions.
Illustrative example
Worked example: a capital gain in January
Hypothetical facts (illustration only, not a real taxpayer): A salaried individual with other income paid all instalments on time based on her regular income. In January she sold shares at a gain and paid the full tax on that gain in the 15 March instalment.
Shortfall
Compared with tax due on returned income, her June, September and December payments look short because of the later gain.
Relief
The shortfall is due to failure to estimate capital gains, and she paid the full tax on it in a remaining instalment.
Result
Section 425(4) removes interest for that shortfall.
Outcome
- No Section 425 interest arises because of the capital gain.
- Any shortfall relating to her regular income would still be tested against the instalment Table.
Glossary
- Tax due on returned income
- The section’s defined tax base for comparing advance-tax instalments, after applicable statutory reductions.
- Instalment shortfall
- The amount by which the table’s due percentage exceeds advance tax paid on or before that instalment date.
Frequently asked questions
What interest rate applies for missing an advance tax instalment?
3% on the shortfall for the June, September and December instalments, and 1% on the shortfall for the March instalment, as set out in the Section 425(1) table.
Is there a safe harbour that avoids Section 425 interest?
Section 425(2) gives tolerance for the relevant first two instalments: at least 12% of tax due on returned income paid by 15 June, and at least 36% paid by 15 September. These checks do not replace the December and March instalment requirements.
Does Section 425 apply differently to presumptive-income taxpayers?
Yes. Under Section 425(3), an assessee declaring profits and gains under Section 58(2) (Table Sl. No. 1 or 3) is charged simple interest at 1% only on shortfall against the 15 March instalment, rather than the four-instalment schedule in Section 425(1).
Is there relief where specified income was not fully estimated?
Section 425(4) excludes interest for a shortfall attributable to under-estimating, or failing to estimate, its specified income where the tax on that income is paid in full in a remaining instalment or by 31 March. The listed income includes capital gains, section 2(49)(n) income, business or professional income arising for the first time, and dividend income; the dividend definition excludes section 2(40)(e).
Need help applying this provision to your situation?
Plan your advance tax instalments to avoid Section 425 interestLast updated 10 October 2026