Income Tax – Waiver of Interest – Circular No. 5/2025

Introduction

On March 28, 2025, the Central Board of Direct Taxes (CBDT) issued Circular No. 5/2025, providing guidelines for the waiver of interest levied under Sections 201(1A)(ii) and 206C(7) of the Income-tax Act, 1961 (hereinafter referred to as “the Act”). This circular aims to address specific cases where deductors or collectors have defaulted in the timely deposit of Tax Deducted at Source (TDS) or Tax Collected at Source (TCS), leading to the accrual of interest liabilities. The circular outlines the conditions and procedures under which such interest may be waived, offering relief to taxpayers in specified circumstances.​

Statutory Framework

Section 201(1A) of the Act

Section 201(1A) imposes interest on deductors who fail to:​

• Deduct the whole or any part of the tax as required under the Act.​Income Tax
• Deposit the tax to the credit of the Central Government after deduction.​Income Tax India

The interest is calculated as follows:​

• Non-Deduction of Tax: Interest at 1% per month or part thereof from the date on which tax was deductible to the date on which it is actually deducted.​
• Non-Payment of Tax After Deduction: Interest at 1.5% per month or part thereof from the date of deduction to the date of actual payment.​

Section 206C(7) of the Act

Section 206C(7) pertains to collectors who fail to:​

• Collect the tax at source as mandated.​
• Deposit the collected tax to the credit of the Central Government.

The interest under this section is levied at 1% per month or part thereof from the date on which tax was collectible to the date on which it is actually paid.​

Provisions for Waiver of Interest

Circular No. 5/2025, issued under Section 119 of the Act, empowers the CBDT to authorize income-tax authorities to reduce or waive the interest charged under Sections 201(1A)(ii) and 206C(7) in specific cases. The waiver is considered to mitigate genuine hardship faced by taxpayers, subject to the fulfillment of certain conditions.​

Conditions for Waiver

The waiver of interest may be granted if the following conditions are satisfied:

1. Voluntary Compliance: The deductor or collector has voluntarily and in good faith deposited the TDS or TCS, along with any applicable interest, before the initiation of any proceedings by the Assessing Officer or any other income-tax authority.​
2. Genuine Hardship: The imposition of interest causes genuine financial hardship to the taxpayer, adversely affecting their business operations or financial stability.​
3. Absence of Malafide Intent: There is no evidence of deliberate or willful default, negligence, or malafide intent on the part of the deductor or collector in failing to deduct, collect, or deposit the tax.​
4. Prompt Rectification: Upon discovery of the default, the taxpayer has taken immediate steps to rectify the lapse by depositing the due amount and has implemented measures to prevent recurrence.​

Procedure for Applying for Waiver

Taxpayers seeking a waiver of interest under this circular must adhere to the following procedure:

1. Submission of Application: File a written application to the jurisdictional Assessing Officer detailing the circumstances leading to the default, the steps taken for rectification, and the grounds for claiming genuine hardship.​
2. Documentation: Provide supporting documents, including proof of tax payment, financial statements demonstrating hardship, and any other relevant evidence.​
3. Verification and Recommendation: The Assessing Officer will verify the claims and forward the application with recommendations to the Principal Commissioner or Commissioner of Income-tax.​
4. Approval: The Principal Commissioner or Commissioner will evaluate the application and may approve the waiver if satisfied that the conditions are met.​

Implications and Considerations

The issuance of Circular No. 5/2025 underscores the CBDT’s commitment to fostering a taxpayer-friendly environment by providing relief mechanisms in genuine cases of hardship. However, taxpayers should consider the following:​

• Timeliness: Prompt action in addressing defaults and applying for waivers is crucial. Delays may be construed as negligence, potentially affecting the outcome of the waiver application.​
• Compliance Culture: Regular compliance with TDS and TCS provisions is essential. While waivers provide relief in exceptional cases, habitual defaulters may not be viewed sympathetically.​
• Record Maintenance: Maintaining accurate records of tax deductions, collections, and payments, along with corresponding documentation, facilitates transparency and supports waiver applications.​
• Legal Consultation: Engaging with tax professionals or legal advisors can aid in accurately assessing eligibility for waivers and in effectively navigating the application process.​

Conclusion

Circular No. 5/2025 serves as a significant instrument in the Indian tax administration’s efforts to balance enforcement with empathy. By delineating clear conditions and procedures for the waiver of interest under Sections 201(1A)(ii) and 206C(7) of the Income-tax Act, 1961, it provides a structured pathway for taxpayers facing genuine hardships due to inadvertent defaults. Taxpayers are encouraged to uphold diligent compliance practices and to utilize such provisions judiciously to maintain the integrity of the tax system.