Section 423, Income-tax Act 2025: Interest for defaults in furnishing return of income

How the 1% interest works, and what changed from Section 234A

One rule, one rate: 1% of your unpaid tax for each month the return is late. Section 423 of the Income-tax Act 2025 carries the old Section 234A forward without changing a rupee, and only renumbers it. The 2025 Act writes the charge as a formula, interest = 1% × A × T, where A is the tax still unpaid after credits and T is the number of months the return ran late. It is simple interest, not compound, so each month adds the same amount rather than interest on interest.

The clock is tied to the due date for filing under Section 263 (the old Section 139). Interest starts the day after that date and runs until the day you actually file. For most individuals the due date for tax year 2026-27 is 31 July 2027, so a return filed on 12 November 2027 is late by August, September, October and part of November, and the part-month counts in full, giving four months of 1%.

Nothing about the money moved from the 1961 Act: still 1% a month, still simple interest, still on the tax net of what you have already paid. What changed is only the section number and the drafting style, effective for tax year 2026-27 and the returns filed from 2027.

Section 423, its title "Interest for defaults in furnishing return of income", and its match to the old Section 234A are cross-checked against published copies of the enacted Act.†

Who pays this interest, and who does not

Anyone who files late with tax still outstanding, and no one whose tax was already covered. The 1% is charged on the gap between your total tax and what you had already paid by the due date, so the question is never how late you are but whether anything was left unpaid.

You pay Section 423 interest when:

• You file your return after the due date and some tax was still unpaid at that date, whether you are a salaried employee with under-deducted TDS, a freelancer, or a business owner.
• You do not file at all and the department later completes your assessment: the interest then runs from the day after the due date until that assessment is completed, which can be far longer than a belated filing.
• A reassessment raises your income for a year: interest runs on the extra tax for the period allowed under that notice.

The three situations carry different start and end dates, set out in the section's own table and covered below.†

There is no interest when nothing is outstanding

This is the point people miss, and it saves the most worry. Section 423 interest is compensatory: it charges you for the use of tax you should have paid on time. If there was no unpaid tax on the due date, there is nothing to compensate, and the interest is nil no matter how late the return.

So a salaried person whose employer deducted enough TDS to cover the whole bill pays no Section 423 interest even filing months late. A person who is due a refund pays none either, because their tax was over-covered, not short. In both cases the only cost of filing late is the flat fee under Section 428, and, for the refund case, the interest the department pays you starts only from the day you actually file. The interest clock on unpaid tax and the fee are two different charges: read them separately.

The base the 1% runs on: tax after TDS, TCS and advance tax

Interest is charged on your tax on total income, reduced by the credits you had already earned by the due date. It is not charged on your gross tax, and not on the whole return value. The amount left after these subtractions, rounded down to the nearest ₹100, is the figure the 1% bites on.

Self-assessment tax paid when you finally file does not reduce the base, so the 1% runs on the shortfall right up to the filing date. This is the same treatment as the old Section 234A, cross-checked against published copies of the enacted Act.†

When the interest clock starts and stops

It starts the day after the filing due date and stops the day you file. The due date is the one set by Section 263 (old Section 139): 31 July for most individuals, or 31 October for anyone whose accounts are audited, of the year after the tax year. For tax year 2026-27 that is 31 July 2027 and 31 October 2027.

The section spells out three cases, because "when you file" is not always simple. The table shows where each starts and ends. In every case a part of a month at either end counts as a whole month.

The belated-return window itself closes nine months after the tax year ends (31 December 2027 for tax year 2026-27); the return-of-income deadlines sit in Section 263 (old Section 139) and are cross-checked against published copies of the enacted Act.†

Why a part of a month is charged as a whole month

The month count rounds up, always. The period is measured in whole months from the day after the due date, and any fraction left over at the end is treated as a full month. There is no daily proration: one day late into a new month costs the same 1% as a full month late.

That single rule is worth real money at the margin. On ₹2,00,000 of unpaid tax, each month is ₹2,000. File on 31 October and the clock reads three months, ₹6,000. File on 1 November, one day later, and it reads four months, ₹8,000. The lesson is blunt: if you are going to be late anyway, file before a new month turns rather than just after it.

How to calculate the interest, step by step

Four steps take you from your return to the interest figure:

• Work out your tax on total income for the year, including surcharge and the 4% cess.
• Subtract the credits you already had by the due date: advance tax, TDS and TCS, and any foreign-tax or other relief the section allows. Do not subtract self-assessment tax you are about to pay. Round the result down to the nearest ₹100. This is A, the unpaid tax.
• Count the months from the day after the due date to the date you file, rounding any part-month up to a full month. This is T.
• Multiply: interest = 1% × A × T. Add it to the tax and the Section 428 fee, then pay the total as you file.

If A works out to nil or a refund, the interest is nil and only the Section 428 fee applies.

How Section 423 stacks with the fee and the advance-tax interest

Late filing rarely triggers just one charge. Section 423 is the interest on unpaid tax, but three siblings can land on the same return, and confusing them is the most common mistake around late filing.

The flat late-filing fee is a different charge under Section 428 (old 234F): ₹1,000 or ₹5,000 depending on your income, owed for being late at all, even when no tax is unpaid. The two advance-tax interest charges, Section 424 (old 234B) and Section 425 (old 234C), also run at 1% a month, but they are triggered by underpaying tax through the year, not by filing late. A taxpayer who both underpaid advance tax and filed the return late can meet all four at once, each computed on its own base.

The overlap to watch is the interest ones. Section 423 and Section 424 can run on almost the same unpaid tax for overlapping months: Section 424 from 1 April on the advance-tax shortfall, Section 423 from the day after the due date on the tax unpaid at filing. They are separate levies and both apply, so clearing the tax early switches off both meters at once.

Section numbers 423, 424, 425 and 428 and their match to the old 234A, 234B, 234C and 234F are cross-checked against published copies of the enacted Act.†

How the interest is actually paid

You pay it yourself, as you file. Section 423 interest is not a demand that arrives later: it is computed inside the return and paid like self-assessment tax, through the tax-payment challan, before the return can be uploaded. The filing utility will not accept a belated return until the tax, this interest and the Section 428 fee are all paid and the challan details entered.

So the order is: work out A, count the months, add the 1% interest to the tax and the fee, pay the total, then file. Getting A right is the whole job, because the utility trusts the figures you enter. If a later assessment finds more tax, the interest is recomputed on the higher base for the same period.

How to keep the Section 423 interest at nil

The figure to remember: 1% a month on the unpaid tax, rounded up to a whole month, on the tax net of TDS and advance tax. Cover your tax on time and this interest disappears, whatever the return does.

The interest is avoidable in a way the fee is not. A few habits keep it at nil or close to it:

• Pay your tax by the due date even if the paperwork slips. The Section 428 fee is flat, but Section 423 interest grows every month: on ₹2,00,000 of unpaid tax that is ₹2,000 a month. Clear the tax by 31 July and file the return a few weeks late, and the interest is nil, leaving only the fee.
• If you must file late, file before a new month turns. A part-month counts in full, so 31 October and 1 November differ by a whole 1% (₹2,000 on ₹2,00,000). Filing on the last day of a month rather than the first day of the next saves a month of interest for free.
• Check your credits before you assume you owe interest. If TDS and advance tax already cover your tax, or you are due a refund, Section 423 interest is nil however late you are, and only the fee is left to settle.
• Pay the shortfall as early as you can, not just before you file. Self-assessment tax paid at filing does not reduce the base for the months the tax stood unpaid, so paying in September rather than at a December filing still leaves interest running to December. The clock stops on the tax, not on the return, only once the tax is actually paid.

Worked examples

Section 423 FAQs