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Advanced Direct Tax Laws and Practice · Computation of Total Income, Tax Liability and Filing of Returns of various Entities excluding Companies

Advance Tax, TDS Credit and Interest under the Income-tax Act, 2025

Updated 11 October 2026 · Fact-checked

Advance tax is tax you pay in instalments during the tax year, on 15 June, 15 September, 15 December and 15 March (15%, 45%, 75%, 100% cumulative). TDS and other credits reduce the tax due. Shortfalls attract interest under section 425. Any balance is paid as self-assessment tax under section 266 before filing the return.

Understand Advance Tax, TDS Credit and Interest

Tax is meant to be paid as income is earned, not in one lump after the year ends. Section 390 sets the modes: deduction or collection at source, advance payment, and payment under section 392(2)(a). These apply even though assessment happens in a later tax year. The tax charge itself under section 4(1) is not affected.

TDS and TCS are paid to the Government on your behalf. Section 390(5) treats them as payment of tax by the person whose income was cut or from whom tax was collected. That is why they are credited against your final liability.

Advance tax covers what TDS does not. The key figure is tax due on the returned income (section 425(5)). It is the tax on the total income declared in your return, less TDS/TCS on income included in that total income, tax reliefs under section 157, foreign tax relief under section 159(1), 159(2) and 160, and tax credit set off as per section 206(2)(e) to (h) and 206(3) and (4). Instalment targets are percentages of this figure.

If you miss the targets, section 425 charges interest on the shortfall. For the first three instalments the rate is 3% on the shortfall, and for 15 March it is 1%. There are safe harbours: no interest if you paid at least 12% by 15 June and at least 36% by 15 September. Some unforeseen incomes are also protected.

After all credits, you pay any remaining tax as self-assessment tax under section 266, before you furnish the return, along with interest and fee. The return must carry proof of payment.

Key rules to remember

Advance tax instalments (section 425(1))
15 June: 15% | 15 September: 45% | 15 December: 75% | 15 March: 100% of tax due on returned income (cumulative)
Each target is cumulative. Shortfall = target minus advance tax already paid by that date.
Interest rate on shortfall (section 425(1))
Interest = shortfall × 3% for June, September and December; shortfall × 1% for March
The Table gives these as flat rates on the shortfall for each instalment. Compute each instalment separately and add.
Safe harbour (section 425(2))
No interest if paid ≥ 12% by 15 June and ≥ 36% by 15 September
Each safe harbour protects only its own instalment. Check each date separately.
Presumptive case (section 425(3))
Interest = 1% × (tax due on returned income − advance tax paid by 15 March)
Applies to an assessee who declares profits and gains under section 58(2) (Table Sl. No. 1 or 3). It is simple interest.
Tax due on returned income (section 425(5))
Tax on returned total income − TDS/TCS − reliefs under sections 157, 159, 160 − credit under section 206(2)(e) to (h), (3), (4)
This is the base for all instalment percentages.
Order of adjustment (section 266(3))
Payment goes first to fee, then interest, then tax
If you pay less than the total, the tax balance stays unpaid.
Unforeseen income relief (section 425(4))
No interest on shortfall caused by under-estimating capital gains, income under section 2(49)(n), first-time business income or dividend income, if the tax on it is paid in full in later instalments or by 31 March
The dividend meaning excludes sub-clause (e) of section 2(40), as stated in section 425(6).

How to solve Advance Tax, TDS Credit and Interest questions

Use the same order for every advance tax or interest question. It keeps the working clear and earns step marks.

  1. 1Find the tax on total income as declared in the return, including cess where the question gives it.
  2. 2Deduct TDS/TCS, reliefs and tax credits listed in section 425(5) to get the tax due on returned income.
  3. 3Compute the cumulative targets: 15%, 45%, 75% and 100% of that figure. Note the 12% and 36% safe-harbour limits.
  4. 4List cumulative advance tax paid by each due date. Only payments made on or before the date count.
  5. 5Find the shortfall for each date. Skip interest for June or September if the safe harbour is met. Check section 425(4) for capital gains, dividend and similar income.
  6. 6Apply 3% to the shortfall for June, September and December, and 1% for March. For a section 58(2) presumptive case, apply 1% on the shortfall at 15 March.
  7. 7Add the interest. Then work out self-assessment tax under section 266: tax due less advance tax, with fee and interest added, paid before filing.
  8. 8State the conclusion in one line, citing sections 425 and 266.

Quickest way: Four-line shortfall table

When to use it: Use it when a question gives quarterly payments and asks for total interest.

  1. Draw four rows: June, September, December, March.
  2. Beside each, write the cumulative target and the cumulative amount paid.
  3. Write the shortfall, and tick the row if the 12% or 36% safe harbour applies (first two rows only).
  4. Multiply surviving shortfalls by 3%, 3%, 3% and 1%, then add.

Common mistakes in Advance Tax, TDS Credit and Interest

  • Treating instalments as separate amounts of 15%, 30%, 30% and 25%

    Students think of the instalments as amounts to be paid each time instead of cumulative targets.

    Fix: Remember the targets are cumulative: 15%, 45%, 75%, 100%. Always subtract total paid so far.

  • Applying 3% on the March shortfall

    Students carry the same rate across all four rows.

    Fix: The Table gives 3% for June, September and December and 1% for March.

  • Forgetting to deduct TDS before taking percentages

    Tax on total income is used as the base directly.

    Fix: Use tax due on returned income as defined in section 425(5), after TDS/TCS, reliefs and credits.

  • Applying the 12% and 36% safe harbours to December and March

    Students assume the safe harbour is a general relief.

    Fix: Section 425(2) covers only 15 June and 15 September. December and March have no safe harbour.

  • Charging interest on shortfall from capital gains or dividend income that arose late

    Section 425(4) is ignored.

    Fix: If the shortfall comes from under-estimating those incomes and you pay the tax in the remaining instalments or by 31 March, no interest arises.

  • Allocating a part-payment of self-assessment tax to tax first

    It feels natural to clear the main liability first.

    Fix: Section 266(3) applies payment to fee, then interest, then tax.

Worked examples

Example 1

Meera Nair, a trader, has tax on her returned total income of ₹4,00,000 (including cess). TDS credited to her is ₹50,000. She paid advance tax of ₹30,000 by 15 June, a cumulative ₹1,30,000 by 15 September, a cumulative ₹2,40,000 by 15 December and a cumulative ₹3,30,000 by 15 March. None of the section 425(4) incomes is involved. Compute interest for deferment of advance tax under section 425.

Show the solution
  1. Tax due on returned income = ₹4,00,000 − ₹50,000 = ₹3,50,000.
  2. June: target 15% = ₹52,500. Safe harbour 12% = ₹42,000. Paid ₹30,000, which is below ₹42,000, so interest applies. Shortfall = ₹52,500 − ₹30,000 = ₹22,500. Interest at 3% = ₹675.
  3. September: target 45% = ₹1,57,500. Safe harbour 36% = ₹1,26,000. Paid ₹1,30,000, which is at least ₹1,26,000, so no interest.
  4. December: target 75% = ₹2,62,500. Paid ₹2,40,000. Shortfall = ₹22,500. Interest at 3% = ₹675.
  5. March: target 100% = ₹3,50,000. Paid ₹3,30,000. Shortfall = ₹20,000. Interest at 1% = ₹200.
  6. Total = ₹675 + ₹0 + ₹675 + ₹200 = ₹1,550.

Answer: Interest under section 425 is ₹1,550.

Example 2

Ravi Menon's tax on total income declared in his return is ₹3,00,000. He paid advance tax of ₹1,50,000 and TDS of ₹80,000 was deducted. Before filing, interest of ₹6,000 and fee of ₹5,000 are payable. He pays ₹60,000 as self-assessment tax. Show how section 266 treats it.

Show the solution
  1. Tax still to pay after credits = ₹3,00,000 − ₹1,50,000 − ₹80,000 = ₹70,000.
  2. Total payable under section 266(1) = ₹70,000 + ₹6,000 + ₹5,000 = ₹81,000.
  3. He paid ₹60,000, which is less than ₹81,000, so section 266(3) applies.
  4. First adjust fee: ₹5,000. Remaining ₹55,000.
  5. Next adjust interest: ₹6,000. Remaining ₹49,000.
  6. The balance ₹49,000 goes to tax. Tax unpaid = ₹70,000 − ₹49,000 = ₹21,000.
  7. Under section 266(8), he is deemed an assessee in default for the unpaid ₹21,000, and the return must carry proof of payment under section 266(1)(b).

Answer: ₹5,000 goes to fee, ₹6,000 to interest and ₹49,000 to tax. ₹21,000 of tax remains unpaid and he is deemed an assessee in default.

Exam tips

  • Show the four-row table in every numerical answer. Examiners award marks for each instalment's shortfall.
  • Start with tax due on returned income and state which credits you deducted, citing section 425(5).
  • Quote the safe harbours exactly: 12% by 15 June and 36% by 15 September.
  • In theory answers, cover three points: section 390 modes, section 425 interest, section 266 self-assessment, then give a clear conclusion.
  • Read the facts for capital gains, dividend or first-year business income and apply section 425(4) before computing interest.

Practice questions from Computation of Total Income, Tax Liability and Filing of Returns of various Entities excluding Companies

Advance Tax, TDS Credit and Interest in other exams

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

Advance Tax, TDS Credit and Interest: frequently asked questions

What are the advance tax due dates under the Income-tax Act, 2025?

Section 425 sets the instalments on 15 June (15%), 15 September (45%), 15 December (75%) and 15 March (100%) of the tax due on returned income. These are cumulative percentages.

What interest applies if advance tax is short?

You pay interest on the shortfall at each date: 3% for 15 June, 15 September and 15 December, and 1% for 15 March. There is no interest for June if you paid at least 12%, or for September if you paid at least 36%.

Does TDS count towards advance tax?

TDS is not advance tax, but it is deducted when computing the tax due on returned income. Section 390(5) treats it as tax paid on behalf of the person whose income it relates to.

When must self-assessment tax be paid?

Under section 266(1), before furnishing the return. You pay the balance tax after advance tax, TDS/TCS and the listed reliefs, plus interest and fee. The return must carry proof of payment.