Section 220(2) interest is 1% a month on an unpaid tax demand. A worked example, what does and doesn't stop it, and the legal ways to reduce or waive it.
Section 220(2) of the Income-tax Act, 1961 provides that where the amount specified in a notice of demand under Section 156 is not paid within the period allowed under Section 220(1), the assessee shall be liable to pay simple interest at the rate of one per cent for every month or part of a month, comprised in the period commencing from the day immediately following the end of the period mentioned in the notice and ending with the day on which the amount is paid. The period allowed for payment is ordinarily 30 days from the date of service of the notice of demand.
Take the case of an assessee who has received a demand of Rs. 10 lakh arising out of an assessment which he considers to be wrong. He files an appeal, keeps the notice aside and waits for the outcome. Two years later the appeal is partly allowed and a demand of Rs. 6 lakh survives, on which interest at one per cent per month has been running throughout, so that the assessee is now required to pay about Rs. 1.44 lakh by way of interest over and above the tax, an amount which he had not provided for.
A note on the law: this article deals with demands under the Income-tax Act, 1961. The Income-tax Act, 2025, applicable from tax year 2026-27, has renumbered most of the provisions and the corresponding section for the year in question should be verified.
It is pertinent to note that the interest under Section 220(2) is simple interest and not compound interest, and that a part of a month is treated as a full month for this purpose. The liability begins on the day following the expiry of the period mentioned in the notice and ends on the day of payment, or on the day the demand is reduced to nil, and it applies irrespective of whether the demand has arisen from a scrutiny assessment, a reassessment, a rectification or an intimation under Section 143(1). The interest is distinct from the interest under Sections 234A, 234B, 234C and 234D, which is levied in the course of the assessment itself on account of delay in filing the return or default in payment of advance tax, whereas Section 220(2) is attracted only on default in payment of the demand. Further, Section 220(2B) provides that where interest under Section 201(1A) has been charged on the amount of tax specified in an intimation under Section 200A for any period, no interest under Section 220(2) shall be charged on the same amount for the same period.
By way of illustration, where an assessment order creates a demand of Rs. 10,00,000 and the notice of demand is served on 10th November 2026, the payment is due by 10th December 2026 and interest starts from 11th December 2026. If the payment is made on 15th March 2027, interest would be charged for four months, the period from 11th March to 15th March 2027 being treated as a full month, and the interest would thus amount to Rs. 40,000.
The filing of an appeal does not by itself stop the running of interest under Section 220(2). A stay of demand granted under Section 220(6) protects the assessee from coercive recovery during the pendency of the appeal, but the interest continues to accrue and becomes payable in case the appeal is ultimately dismissed, which is precisely what happened in the example given above.
Read More: Stay of Demand Under Section 220(6)
The first and simplest course is to pay the undisputed portion of the demand within 30 days, so that interest runs only on the disputed balance, and to record the response on the portal as partly agreed so that the department's records reflect the payment correctly. The demand itself should also be examined against the assessment order, since errors in the computation, credit for TDS or advance tax not given, duplicate demands and arithmetical mistakes are not uncommon, and where such a mistake is found a rectification under Section 154 reduces both the demand and the interest thereon.
Where the demand is disputed, an application for stay may be filed before the expiry of 30 days, proposing a reasonable part payment, and it has been held by the courts that the payment of 20 per cent of the disputed demand is not mandatory in every case. An appeal filed in time and properly argued remains the most effective way of reducing the base on which interest is charged, as any relief granted by the CIT(A), the ITAT or the High Court automatically reduces the interest. Where a refund is due to the assessee for some other year, he may also consent to its adjustment against the demand, which stops the interest on the adjusted amount from the date of adjustment without any outflow of cash.
Section 220(2A) empowers the Principal Chief Commissioner, Chief Commissioner, Principal Commissioner or Commissioner to reduce or waive the interest paid or payable under Section 220(2), provided he is satisfied that the payment of such amount has caused or would cause genuine hardship to the assessee, that the default in payment was due to circumstances beyond the control of the assessee, and that the assessee has co-operated in any inquiry relating to the assessment or any proceeding for the recovery of any amount due from him. It has been held in a number of cases that the three conditions are cumulative and all of them have to be satisfied, though the authority is also empowered to grant partial relief in proportion to the extent to which the conditions are fulfilled. The monetary limits for the different authorities have been laid down by the CBDT vide Circular No. 15/2024 dated 4th November 2024, as per which the Principal Commissioner or Commissioner can decide cases involving interest up to Rs. 50 lakh, the Chief Commissioner or Director General cases between Rs. 50 lakh and Rs. 1.5 crore, and the Principal Chief Commissioner cases above Rs. 1.5 crore. The application should be made in writing alongwith financial statements, bank statements and evidence of the circumstances which led to the delay.
The CBDT has also from time to time waived the interest under Section 220(2) for specific categories of demand paid by a particular date, an instance being the demands raised on withdrawal of the rebate under Section 87A on income chargeable at special rates, where interest was waived if the tax was paid on or before 31st December 2025. That window has since closed, but it is worthwhile to check whether any such scheme is in force for the demand in question.
Disclaimer: The contents of this article are for general information only.
Interest is payable at the rate of one per cent for every month or part of a month, as simple interest, from the day following the expiry of the period mentioned in the notice of demand till the date of payment.
Yes, a part of a month is treated as a full month for the purpose of computing the interest, and therefore even a delay of a few days into a new month results in interest for the entire month.
The interest can be reduced or waived under Section 220(2A) where all the three conditions laid down therein are satisfied, and the waiver is neither automatic nor necessarily full, the authority being empowered to grant partial relief as well.
The filing of an appeal does not by itself stop the interest, though any reduction in the demand as a result of the appeal reduces the interest correspondingly, and a stay of demand only protects the assessee from recovery.
The interest under Section 234B is levied for default in payment of advance tax whereas the interest under Section 220(2) is levied for delay in payment of the demand raised by the notice under Section 156, and the two are entirely distinct.
DSRV & Co. LLP has handled tax disputes since 1987. We're an ICAI-registered, peer-reviewed CA firm in Gurugram. Send us the demand notice and we'll check the figure, work out your interest exposure and tell you which of these routes fits, before day 30.
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