Direct and Indirect Taxation · Advance Tax

Interest for Default in Payment of Advance Tax

Q: What is the difference between interest for default and interest for deferment of advance tax?

Default interest applies when total advance tax paid is below 90% of assessed tax, and it runs on the overall shortfall from 1 April. Deferment interest applies when a particular instalment is short or late, and it runs on that instalment's shortfall for the months until the next instalment. You can be charged both on the same facts.

Q: When is no interest charged for advance tax shortfall?

There is no default interest if advance tax paid is at least 90% of assessed tax. There is no deferment interest on early shortfall if a company has paid at least 12% by 15 June and 36% by 15 September, or another assessee at least 27% by 15 September. A shortfall caused by income that arose after an instalment date is also not charged if the tax is paid in the remaining instalments or by 31 March.

Q: How is the rate of interest calculated for advance tax default?

It is 1% per month or part of a month, calculated as simple interest. Any part of a month counts as a whole month. The shortfall is rounded down to the nearest ₹100 before you apply the rate.

Q: Is advance tax paid adjusted against the final tax liability?

Yes. Advance tax paid is credited against the tax payable, together with TDS and TCS. If there is a balance, you pay it as self-assessment tax along with any interest. If you paid more than needed, the excess is refunded.

Updated 10 October 2026 · Fact-checked

Advance tax applies only where your tax payable after TDS/TCS is ₹10,000 or more. If you are liable and pay less than 90% of that net (assessed) tax, you pay 1% simple interest per month on the shortfall. Separately, if an instalment is short or late, you pay 1% per month for the deferment period. Advance tax paid is credited against your final tax.

Understand Interest for Default in Payment of Advance Tax

Advance tax is tax you pay during the year in which you earn income, not after it. The Income-tax Act, 2025 backs this with interest. Two different interest charges can apply, and they answer two different questions.

The first is interest for default in payment of advance tax. It asks: did you pay enough advance tax for the whole year? If you were liable to pay advance tax and your total advance tax is less than 90% of the assessed tax, interest applies. It runs at 1% per month or part of a month on the shortfall, as simple interest, from 1 April after the end of the tax year.

The second is interest for deferment of advance tax. It asks: did you pay on time, instalment by instalment? If an instalment falls short of the required cumulative percentage on the due date, interest applies at 1% per month on that shortfall, for the months until the next instalment is due. It can apply even when you pass the 90% test.

There are relief rules. A small shortfall in early instalments is ignored, and a shortfall caused by income that arose late (such as a capital gain or casual income) carries no deferment interest if you pay the tax in the remaining instalments or by 31 March.

All advance tax you pay is credited against your final tax liability, along with TDS and TCS. Interest is then added to the balance payable. Any excess tax paid comes back as a refund.

Key rules to remember

Default interest (shortfall of advance tax): Interest = 1% × number of months (part of a month = full month) × (Assessed tax − Advance tax paid); Applies only if advance tax paid is less than 90% of assessed tax. Round the shortfall down to the nearest ₹100. Simple interest.
Assessed tax: Assessed tax = Tax on total income − TDS/TCS and other credits allowed; This is the base for the 90% test. Advance tax paid is not deducted when finding assessed tax.
Period for default interest: From 1 April after the tax year to the date the total income is determined (or, in a sum, to the month of paying the balance tax); Self-assessment tax paid reduces the shortfall from the month of payment. Count April as the first month.
Instalments: companies: 15% by 15 June; 45% by 15 Sept; 75% by 15 Dec; 100% by 15 March; Cumulative percentages of advance tax due.
Instalments: other assessees: 30% by 15 Sept; 60% by 15 Dec; 100% by 15 March; No June instalment. Presumptive-taxation assessees pay the whole amount by 15 March.
Deferment interest: Interest = 1% × months × shortfall in the instalment; Months: 3 for the shortfall of each instalment due in June, September and December, as applicable to the assessee type (a company has all three; other assessees have only September and December); 1 month for the March shortfall.
No deferment interest on early shortfall: Company: ≥ 12% paid by 15 June and ≥ 36% by 15 Sept. Other assessees: ≥ 27% paid by 15 Sept; Percentages are of tax due on the returned income. There is no such relief for the December instalment. The March instalment must reach 100%.

How to solve Interest for Default in Payment of Advance Tax questions

Treat the two interest charges as two separate sums. Do the 90% test first, then the instalment-wise test.

1Find the tax on total income, then deduct TDS, TCS and other credits. This is the assessed tax (use returned income if the question says no change).
2Check whether advance tax is payable at all. If the net tax is below ₹10,000, there is no advance tax liability and no interest.
3Total the advance tax paid. If it is at least 90% of assessed tax, there is no default interest. If not, go to step 4.
4Compute default interest: shortfall (rounded down to ₹100) × 1% × months from 1 April to the date of payment or determination.
5List each instalment due date and the cumulative percentage required. Compare it with cumulative advance tax paid on that date.
6Apply the relief tests (12% and 36% for companies, 27% for others, and the late-income rule). Where relief does not apply, charge 1% × 3 months on the shortfall of each instalment due in June, September and December (as applicable to the assessee type) and 1% × 1 month on the March shortfall.
7Add both interests in a clear table. Show advance tax credit, TDS and interest in the final tax payable statement.

Quickest way: Two-table method

When to use it: Use this for any numerical question that gives advance tax paid on specific dates.

Table 1 (default): Assessed tax, 90% of it, advance tax paid. If paid ≥ 90%, write 'No interest' and move on.
If paid < 90%, interest = shortfall × 1% × months. Count the first month as April.
Table 2 (deferment): columns for due date, required cumulative amount, paid cumulative, shortfall, months, interest.
Check the relief percentage before computing each early row. If it is met, write nil.
Add the interests and show them separately in the answer so each earns marks.

Common mistakes in Interest for Default in Payment of Advance Tax

Charging default interest on the whole assessed tax instead of the shortfall.
Students remember that the 90% test decides the liability and wrongly apply interest to the full tax.
Fix: Once the 90% test fails, interest is on assessed tax minus advance tax paid, not on the full tax.
Using advance tax paid to reduce assessed tax before the 90% test.
Advance tax and TDS both feel like 'tax already paid'.
Fix: Only TDS, TCS and similar credits reduce assessed tax. Advance tax is the amount you compare with it.
Counting the months wrongly, such as skipping April or ignoring 'part of a month'.
Students count the gap between dates rather than the months touched.
Fix: Any part of a month counts as a full month. Count April as month one, then each month up to and including the month of payment.
Applying the June instalment to non-corporate assessees.
The company schedule is memorised more easily.
Fix: Non-corporate assessees have only 15 Sept (30%), 15 Dec (60%) and 15 March (100%). Check the assessee type first.
Charging 3 months of deferment interest on the March shortfall.
Students copy the 3-month rule from earlier instalments.
Fix: The March shortfall carries 1% for 1 month only.
Forgetting to round the shortfall down to the nearest ₹100.
Rounding is a small rule that is easy to miss under time pressure.
Fix: Round the shortfall down before applying the rate, for example ₹1,04,670 becomes ₹1,04,600.

Worked examples

Example 1

Mr. Arun Nair, a trader (non-corporate), has net tax due of ₹2,40,000 for tax year 2026-27 after TDS, on his returned income. He paid advance tax of ₹40,000 on 15 September, ₹1,00,000 on 15 December and ₹80,000 on 15 March. Compute interest for default and for deferment of advance tax.

Show the solution

Assessed tax = ₹2,40,000. 90% of it = ₹2,16,000.
Advance tax paid = ₹40,000 + ₹1,00,000 + ₹80,000 = ₹2,20,000. This is more than ₹2,16,000, so there is no default interest.
Deferment, 15 September: required 30% of ₹2,40,000 = ₹72,000. Paid ₹40,000. Shortfall = ₹32,000. Relief needs at least 27% (₹64,800), which is not met. Interest = 1% × 3 × ₹32,000 = ₹960.
Deferment, 15 December: required 60% = ₹1,44,000. Cumulative paid = ₹1,40,000. Shortfall = ₹4,000. Interest = 1% × 3 × ₹4,000 = ₹120.
Deferment, 15 March: required 100% = ₹2,40,000. Cumulative paid = ₹2,20,000. Shortfall = ₹20,000. Interest = 1% × 1 × ₹20,000 = ₹200.
Total deferment interest = ₹960 + ₹120 + ₹200 = ₹1,280.

Answer: Default interest: nil. Deferment interest: ₹1,280. The balance tax of ₹20,000 is paid as self-assessment tax along with the interest.

Example 2

Meera Traders (a firm) has assessed tax of ₹3,00,000 for tax year 2026-27 after TDS. It paid advance tax of only ₹2,00,000 by 15 March. It paid the balance ₹1,00,000 as self-assessment tax on 20 July 2027. Compute interest for default in payment of advance tax. Ignore deferment interest.

Show the solution

Assessed tax = ₹3,00,000. 90% = ₹2,70,000.
Advance tax paid = ₹2,00,000, which is less than ₹2,70,000, so default interest applies.
Shortfall = ₹3,00,000 − ₹2,00,000 = ₹1,00,000 (already a multiple of ₹100).
Period: from 1 April 2027 to 20 July 2027. The months touched are April, May, June and July = 4 months.
Interest = 1% × 4 × ₹1,00,000 = ₹4,000.
Credit: advance tax ₹2,00,000 plus self-assessment tax ₹1,00,000 is set against the tax. The interest of ₹4,000 is an additional payment.

Answer: Interest for default in payment of advance tax = ₹4,000.

Exam tips

Start every answer by naming the assessee type. It decides the instalment schedule and the relief percentages.
Show the 90% test as an explicit line. Examiners give a mark for the test even when the interest turns out nil.
Keep default interest and deferment interest in two separate headings and add them only at the end.
Read the question for late-arising income such as capital gains or lottery winnings. It usually signals the no-deferment-interest relief.
In MCQs, check the months count and the 1% rate first. Wrong options are often built from 3 months used for the March shortfall or the full tax used as the base.

Practice questions from Advance Tax