[Section 220(2)]: Interest for Late Payment of Demand of Tax, Interest, Penalty, Etc.

Section 220(2) of the Income Tax Act, 1961, imposes interest @ 1% per month on unpaid tax demands if the assessee fails to pay within 30 days of receiving the notice.

1. Key Provisions of Section 220(2)

1. When Does Interest Apply?

• • Tax demand raised(regular assessment, reassessment, penalty, etc.).
  • Assessee fails to paywithin 30 days of the demand notice.

2. Interest Rate & Calculation

• • 1% simple interest per month(or part of a month).
  • Calculated from the due date(30 days after notice) till actual payment.

3. Example Calculation

• • Tax demand notice issued:1st June 2025
  • Due date for payment:1st July 2025 (30 days later)
  • Actual payment made:15th October 2025
  • Delay:5 months → Rounded to 4 months
  • Interest on ₹50,000 demand:

₹50,000 × 1% × 4 = ₹2,000

4. Minimum Interest

• • Even 1-day delayattracts 1 full month’s interest (since part-months count as full months).

🔹 Exceptions & Waivers

1. No Interest if:

• • Demand is fully paid within 30 days.
  • The assessing officer grants an extension(rare).

2. Stay on Demand:

• • If assessee files an appeal + secures a stay order, interest may be paused.

🔹 Consequences of Non-Payment

✔ Penalty under Section 221 (up to the tax amount).

✔ Prosecution risk (for willful evasion).

✔ Credit score impact (if linked to PAN).

🔹 How to Avoid Section 220(2) Interest?

✔ Pay within 30 days of the demand notice.

✔ File an appeal + stay application if disputing the demand.

✔ Seek installment payments (under Section 220(3) in genuine hardship cases).

2.  Adjustment of Interest Under Section 220(2) – First Proviso Explained

The first proviso to Section 220(2) of the Income Tax Act, 1961, allows for an increase or decrease in interest payable on unpaid tax demands based on subsequent modifications to the tax liability. Here’s a detailed breakdown:

🔹 Key Provisions of the First Proviso to Section 220(2)

1. When Can Interest Be Adjusted?

Interest under Section 220(2) is recalculated if the original tax demand is later revised due to:

• • Appellate orders(CIT(A), ITAT, High Court, Supreme Court).
  • Reassessment orders(Section 147/153A).
  • Rectification orders(Section 154).
  • Revision orders(Section 263/264 by Principal CIT/CIT).

2. Effect on Interest Calculation

• • If tax liability increases→ Additional interest is charged on the enhanced amount from the original due date.
  • If tax liability decreases→ Excess interest paid is refunded (with interest under Section 244A).

3. Example Scenarios

Case 1: Tax Demand Increased

• • Original demand (2024):₹1,00,000 (paid after 4 months → ₹4,000 interest).
  • Revised demand (2025):₹1,50,000 (due to reassessment).
  • Additional interest:₹50,000 × 1% × 4 = ₹2,000 (total interest now ₹6,000).

Case 2: Tax Demand Reduced

• • Original demand (2024):₹1,00,000 (paid after 4 months → ₹4,000 interest).
  • Revised demand (2025):₹60,000 (after appeal).
  • Recalculated interest:₹60,000 × 1% × 4 = ₹2,400.
  • Refund due:₹1,600 (₹4,000 – ₹2,400) + interest under Section 244A.

🔹 Conditions for Waiver/Reduction of Interest

Under Section 220(2A), the tax authorities may waive or reduce interest if:

1. Genuine hardshipexists (e.g., financial distress).
2. Default was beyond taxpayer’s control(e.g., natural disasters).
3. Taxpayer cooperatedin assessments/recovery proceedings.

Note:

• Waiver thresholds:
  • Up to ₹50 lakh:Commissioner-level officer.
  • ₹50 lakh–₹1.5 crore:Chief Commissioner.
  • Above ₹1.5 crore:Principal Chief Commissioner

3.  Reduction or Waiver of Interest Under Section 220(2) [Section 220(2A)]

Section 220(2A) of the Income Tax Act, 1961, empowers the Central Board of Direct Taxes (CBDT) or Principla Chief Commissioner/Chief Commissioner to reduce or waive interest charged under Section 220(2) in genuine hardship cases.

1. When Can Interest Be Waived/Reduced?

The tax authority may grant relief if:

✅ Payment would cause genuine hardship (e.g., financial distress, medical emergency, natural calamity).

✅ Default was beyond the taxpayer’s control (e.g., legal disputes, bank delays).

✅ Taxpayer has cooperated with the department (timely responses, no concealment).

2. Who Can Approve the Waiver?

3. Procedure for Waiver Application

1. File a petitionin writing to the jurisdictional CIT/Pr. CIT.
2. Submit supporting documents(bank statements, medical reports, etc.).
3. Await departmental inquiry(may involve hearings).
4. Order passed within 6 months(if accepted, interest is adjusted).

4. Cases Where Waiver is Typically Granted

✔ Natural disasters (floods, earthquakes).

✔ Serious illness/death in family affecting finances.

✔ Bankruptcy/liquidation proceedings.

✔ Government delays (e.g., pending refunds affecting liquidity).

5. Cases Where Waiver is Usually Denied

❌ Willful default (intentional non-payment).

❌ Lack of documentary proof.

❌ Tax evasion or concealment detected.

6.  Example Scenario

Case:

• A small business owner faced a fire accident(proof submitted) and couldn’t pay a ₹5 lakh demand on time.
• Interest accrued:₹15,000 (3 months @1%).
• Waiver grantedby CIT due to genuine hardship.

4.  Exclusion of Interest Under Section 220(2) When Charged Under Section 201(1A) [Section 220(2B)]

Section 220(2B) of the Income Tax Act, 1961, prevents double charging of interest in cases where:

• Interest is already levied under Section 201(1A)(for default in TDS deduction/deposit), and
• The same amount is subject to demand notice under Section 220(2).

1. When Does It Apply?

• A taxpayer defaults on TDS deduction/deposit→ Interest charged under Section 201(1A).
• Later, the Assessing Officer (AO) raises a demandfor the same tax → Normally, Section 220(2) interest would apply.
• Section 220(2B) intervenesto ensure no double interest is charged.

2. Effect

• Section 220(2) interest is waivedto the extent interest was already paid under Section 201(1A).
• Only one interest liabilityapplies (either under 201(1A) or 220(2)).

3. Example

Scenario:

• A company fails to deduct TDSof ₹1,00,000 on contractor payments.
• Interest under Section 201(1A):₹1,00,000 × 1% × 3 months = ₹3,000 (paid).
• Later, the AO raises a demandfor the same ₹1,00,000.
• Section 220(2B) applies→ No additional interest under Section 220(2) since Section 201(1A) interest was already paid.