CBDT waives interest on Late payment of Tax Demand due to Income Tax Rebate claim on special Rate Income:

CBDT waives interest on Late payment of Tax Demand due to Income Tax Rebate claim on special Rate Income The Central Board of Direct Taxes (CBDT) under the Ministry of Finance (Department of Revenue), Government of India, has recently issued an official circular No. 13/2025 [F. No. 275/09/2025-IT(Budget)], dated September 19, 2025. The circular is regarding the waiver of interest under section 220(2) of the Income-tax Act, 1961, for certain taxpayers who face interest due to late payment of tax demands arising from specific rectifications.

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Under the New Tax Regime, Section 115BAC(1A) of the Income Tax Act allows taxpayers to pay tax. However, the law says that this is subject to other rules in Chapter XII of the Act. Chapter XII includes rules for incomes taxed at special rates. These are not included under 115BAC(1A) at the time of deciding tax liability. Section 87A provides a rebate for individuals with income below a certain limit, as set by the government. But there is a proviso clause (clause b) in section 87A that applies to incomes taxed under 115BAC(1A). The problem here is that sometimes returns of taxpayers are already processed, and rebates under Section 87A of the Income Tax Act are incorrectly given on incomes that should be taxed at special rates. In these cases, when the department discovers the mistake, it needs to carry out rectification in order to disallow such rebates. This correction eliminates the incorrectly given rebate, which ultimately increases the tax demand. If the taxpayer delays paying this corrected amount, interest is imposed under section 220(2) for late payment. This could be an unexpected financial burden for the taxpayer.

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In order to solve this mistake and help taxpayers avoid this genuine hardship, the CBDT, in exercise of its powers granted under Section 110 of the Act, has directed the tax department to waive the interest under Section 220(2) if the taxpayer pays the demand resulting from rectification by December 31, 2025. Meaning, if you are getting a notice from the Tax Department to pay extra tax because of a wrong rebate, you can pay the demand by December 31, 2025, without paying any interest, even if technically interest would have applied. However, if you still do not pay the demand as a result of the rectification order issued by CPC by December 31, 2025, then the department will have the authority to impose interest under section 220(2) of the Act. The interest will be calculated from the day immediately following the end of the normal payment period mentioned in subsection (1) of section 220. So, delaying payment after the deadline will attract interest from the original due date.