Taxation · Tax Deduction or Collection at Source and Advance Tax

Interest for Default in Advance Tax Payment

Updated 4 October 2026 · Fact-checked

Interest for default in advance tax has two parts. Shortfall interest applies when advance tax paid is below 90% of assessed tax. Deferment interest applies when an instalment is less than its due percentage. Both run at 1% a month. Find the shortfall, count the months, multiply. Late capital gains and lottery income get relief.

Understand Interest for Default in Advance Tax Payment

Advance tax is meant to be paid during the tax year, not after it. The law backs this with interest. If you do not pay enough, or pay late, you owe interest at 1% per month. There are two separate charges, and they test different things.

Shortfall interest (the old 234B idea) asks one question: by 31 March, had you paid at least 90% of your final (assessed) tax? If not, you pay 1% per month or part of a month on the whole shortfall, from 1 April after the tax year until the shortfall is paid. It applies only to a person who was liable to pay advance tax.

Deferment interest (the old 234C idea) asks a different question: did each instalment reach its due percentage on its due date? If not, you pay 1% per month on that instalment's shortfall. It is 3 months on the 15 June, 15 September and 15 December shortfalls for companies, 3 months on the 15 September and 15 December shortfalls for non-corporates, and 1 month on the 15 March shortfall for everyone. The base here is the tax on the returned income, not the assessed tax.

The Income-tax Act, 2025 keeps these rules under new section numbers. Learn them by name and rule. Use a section number only if your ICAI study material for May 2027 gives it and you are sure of it.

Some income cannot be predicted, such as capital gains, winnings from lotteries and games, and dividend income. If the shortfall exists only because this income arose after an instalment date, and you pay the tax on it in the remaining instalments or by 31 March, no deferment interest is charged on that part.

Key rules to remember

Advance tax liability: Advance tax is payable if tax payable after TDS/TCS and reliefs ≥ ₹10,000; A resident senior citizen with no business or professional income need not pay advance tax.
Instalments for companies: 15% by 15 June; 45% by 15 September; 75% by 15 December; 100% by 15 March; Percentages are cumulative, on the tax due on current-year income.
Instalments for non-corporate assessees: 30% by 15 September; 60% by 15 December; 100% by 15 March; No instalment on 15 June. An eligible presumptive-scheme assessee pays 100% in one instalment by 15 March.
Shortfall interest: 1% × number of months (or part) × (assessed tax − advance tax paid − TDS/TCS − reliefs); Applies only if advance tax paid is below 90% of assessed tax. Months run from 1 April after the tax year to the date the shortfall is paid.
Deferment interest: Companies: 1% × 3 months × shortfall on each of 15 June, 15 September and 15 December. Non-corporates: 1% × 3 months × shortfall on each of 15 September and 15 December. All assessees: 1% × 1 month × shortfall on 15 March; Shortfall = due cumulative amount − cumulative advance tax paid by the due date. Base is tax on returned income after TDS/TCS and reliefs.
No-interest safe limit: Companies: 12% on the 15 June instalment and 36% on the 15 September instalment. Non-corporates: 36% on the 15 September instalment. No safe limit for 15 December or 15 March; Test each date on its own. If cumulative advance tax paid by that date is at least this percentage of tax on returned income, no deferment interest arises on that instalment's shortfall. Later instalments have no safe limit.
Late-arising income relief: No deferment interest on the shortfall caused by capital gains, lottery or game winnings, or dividend income arising after the instalment date, if tax on it is paid in the remaining instalments or by 31 March; The relief covers only that part of the shortfall. Check your study material for the full list of similar incomes.

How to solve Interest for Default in Advance Tax Payment questions

Handle the two interests separately. Both can apply to the same assessee in the same year.

1Compute tax on total income. Deduct TDS, TCS and reliefs to get the net tax. Check whether advance tax was payable (net tax of ₹10,000 or more, and no senior citizen exemption).
2Decide whether the assessee is a company or non-corporate. This fixes the instalment percentages.
3For shortfall interest: take the assessed tax net of TDS/TCS. Compare advance tax paid with 90% of it. If paid is below 90%, shortfall = assessed tax − advance tax paid.
4Count months from 1 April after the tax year to the payment date. A part of a month counts as a full month. Interest = 1% × months × shortfall.
5For deferment interest: take the tax on returned income net of TDS/TCS. Work out the cumulative due amount at each date and subtract cumulative payments made by that date.
6Apply the safe limit to the instalment on its own date first: 12% on 15 June (companies only) and 36% on 15 September (companies and non-corporates). If the limit is met on that date, that date's shortfall carries no interest. Do not apply any safe limit to 15 December or 15 March. Then remove from each due amount the tax on capital gains, winnings or dividend arising after that date.
7Interest = 1% × 3 × shortfall on each of 15 June, 15 September and 15 December for companies, or on each of 15 September and 15 December for non-corporates. Add 1% × 1 × shortfall for 15 March for all assessees. Add them up.
8Show both interests separately and give the total.

Quickest way: Table method for deferment interest

When to use it: Use it for any numerical question with instalment dates and payments, in both MCQs and written answers.

Draw a four-column table: due date, cumulative amount due, cumulative amount paid, shortfall.
Write the cumulative percentages straight from memory: 15/45/75/100 for companies; 30/60/100 for others.
Multiply shortfall by 3% for each date before 15 March (three dates for companies, two for others) and by 1% for 15 March. Do not compute month by month.
For MCQs, first check the safe limits on their own dates and the 90% test. Where a limit is met, it can rule out a choice quickly. Still compute the other dates before you pick an option.
Keep the format: tax computation, table, interest under each charge, total. Step marks are given for each of these.

Common mistakes in Interest for Default in Advance Tax Payment

Using assessed tax as the base for deferment interest.
Both interests sound alike, so students use one base for both.
Fix: Deferment uses tax on returned income. Shortfall interest uses assessed tax.
Charging 3 months of interest on the 15 March instalment.
Students copy the 3% pattern from earlier instalments.
Fix: The last instalment carries 1% for 1 month only. The earlier instalments (15 June, 15 September and 15 December for companies; 15 September and 15 December for non-corporates) carry 1% for 3 months.
Forgetting to deduct TDS and TCS before applying percentages.
Students apply the percentages to total tax.
Fix: Percentages apply to tax net of TDS, TCS and reliefs.
Giving capital gains relief when the gain arose before the instalment date.
Students assume capital gains are always excluded.
Fix: Exclude the gain only from instalments due before the gain arose. For later instalments it must be included in the due amount.
Applying the 90% test to deferment interest, or not applying it to shortfall interest.
Students mix up the two tests.
Fix: The 90% test belongs only to shortfall interest. Deferment interest uses instalment percentages and the 12% (15 June, companies) and 36% (15 September) safe limits.
Counting a part of a month as zero.
Students count whole months only.
Fix: Any part of a month counts as one full month for shortfall interest.

Worked examples

Example 1

Mr Rao, a resident individual with no presumptive income, has tax on returned income of ₹2,00,000 after TDS. He paid advance tax of ₹40,000 on 14 September, ₹50,000 on 12 December and ₹1,10,000 on 10 March. Compute the interest for deferment of advance tax. Assume assessed tax equals tax on returned income.

Show the solution

Mr Rao is a non-corporate assessee. The due cumulative amounts are 30% by 15 September, 60% by 15 December and 100% by 15 March.
15 September: due 30% × ₹2,00,000 = ₹60,000. Paid ₹40,000. Shortfall ₹20,000. The safe limit is 36% = ₹72,000, and ₹40,000 is below it, so interest applies.
15 December: due 60% × ₹2,00,000 = ₹1,20,000. Cumulative paid ₹40,000 + ₹50,000 = ₹90,000. Shortfall ₹30,000.
15 March: due ₹2,00,000. Cumulative paid ₹90,000 + ₹1,10,000 = ₹2,00,000. No shortfall.
Interest for the first instalment = 1% × 3 × ₹20,000 = ₹600.
Interest for the second instalment = 1% × 3 × ₹30,000 = ₹900.
Shortfall interest: advance tax paid is ₹2,00,000, which is 100% of assessed tax and not below 90%. So no shortfall interest.

Answer: Total deferment interest = ₹600 + ₹900 = ₹1,500. There is no shortfall interest.

Example 2

Ms Mehta, a resident individual, has tax of ₹1,00,000 on income other than capital gains. On 20 December she earns a long-term capital gain, and the tax on it is ₹50,000. Total tax on returned income is ₹1,50,000 after TDS. Her advance tax payments are ₹20,000 on 15 September, ₹20,000 on 15 December and ₹1,10,000 on 15 March. Compute the interest for deferment.

Show the solution

The capital gain arose on 20 December, after the 15 September and 15 December instalment dates. So for those two dates, the due amount is worked on ₹1,00,000 of tax, not ₹1,50,000.
15 September: due 30% × ₹1,00,000 = ₹30,000. Paid ₹20,000. Shortfall ₹10,000. The 36% safe limit is not met, so interest applies.
15 December: due 60% × ₹1,00,000 = ₹60,000. Cumulative paid ₹40,000. Shortfall ₹20,000.
15 March: due ₹1,50,000. Cumulative paid ₹20,000 + ₹20,000 + ₹1,10,000 = ₹1,50,000. No shortfall. The tax on the gain was paid by 15 March, so the relief for late-arising capital gains is available.
Interest for 15 September = 1% × 3 × ₹10,000 = ₹300.
Interest for 15 December = 1% × 3 × ₹20,000 = ₹600.
Shortfall interest: advance tax paid equals 100% of assessed tax, so none.

Answer: Total deferment interest = ₹300 + ₹600 = ₹900. No interest arises on the tax on the capital gain, and there is no shortfall interest.

Exam tips

Write the instalment percentages at the top of your answer before you compute anything. It shows method and saves you from mixing company and non-company rates.
In every problem, look first for TDS, TCS and a capital gain, lottery or dividend date. These are the usual twists.
Present deferment interest in a small table. Examiners award marks for each instalment's shortfall.
In MCQs, check the 90% test and the 12%/36% safe limits first. They can save time, but do not assume the answer is nil interest. Work out every date.
Keep the two interests apart. State the base, the rate, the months and the result for each.

Practice questions from Tax Deduction or Collection at Source and Advance Tax

Interest for Default in Advance Tax Payment in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Interest for Default in Advance Tax Payment: frequently asked questions

What is the difference between shortfall interest and deferment interest on advance tax?

Shortfall interest applies when advance tax paid by 31 March is below 90% of assessed tax. It is charged on the whole shortfall from 1 April. Deferment interest applies when an individual instalment is below its due percentage on its due date, and it is charged on that instalment's shortfall.

How is interest calculated on capital gains and lottery income for advance tax?

If the capital gain or winning arises after an instalment date, you need not have paid tax on it by that date. If you pay the tax in the remaining instalments or by 31 March, no deferment interest is charged on that part. Interest still applies if you miss those later dates.

Do the old sections 234B and 234C still apply for May 2027?

No. From May 2027 you use the Income-tax Act, 2025, which has new section numbers and the term tax year. The rules on 1% interest, the 90% test and the instalments are what you must learn. Quote section numbers only if you are sure of them.

Can I be charged both interests in the same year?

Yes. They test different things and are computed separately. You can pay deferment interest for a late instalment even if you reach 90% of assessed tax by 31 March and escape shortfall interest.