In a significant relief to taxpayers facing unexpected tax demands due to rectifications under the new tax regime, the Central Board of Direct Taxes (CBDT) has issued Circular No. 13/2025, dated September 2025, waiving interest under Section 220(2) of the Income-tax Act, 1961 in specific circumstances. This move is aimed at mitigating the financial hardship caused to honest taxpayers due to technical adjustments made during the processing of their returns.
📌 Background
The issue arises from a technical interaction between Section 115BAC(1A) — the default personal income tax regime introduced in Budget 2023 — and Chapter XII of the Income-tax Act, which deals with incomes taxed at special rates (like capital gains, lottery winnings, etc.).
Section 115BAC(1A) offers concessional tax rates but excludes certain incomes taxed under special provisions. Despite this, during the initial return processing for Assessment Year 2024-25, some taxpayers were incorrectly granted the rebate under Section 87A even on incomes taxed at these special rates.
Later, when the mistake was identified, rectifications were initiated by the Centralized Processing Centre (CPC). This led to demand notices being issued to taxpayers who had received excess rebate. Naturally, any delay in paying these demands attracts interest under Section 220(2) — adding to the financial burden.
✅ CBDT’s Relief: Waiver of Interest
To address this unintended consequence, the CBDT has invoked its powers under Section 119 of the Income-tax Act and issued a one-time waiver for interest payable under Section 220(2), subject to a key condition:
The taxpayer must pay the full demand raised as a result of the rectification order on or before 31st December, 2025.
If this condition is met, no interest under Section 220(2) will be levied. However, if the payment is delayed beyond this deadline, interest will accrue from the day after the standard 30-day period (as per Section 220(1)) ends.
🧾 Practical Impact
This waiver is expected to benefit a large number of salaried and small taxpayers who unknowingly received excess rebate due to software or system errors at the processing stage. Many such taxpayers had already opted into the new default tax regime without a full understanding of its impact on special rate incomes.
With the December 31, 2025 deadline in place, affected taxpayers are advised to:
- Check their tax portal for any rectification orders or new demand notices.
- Verify the computation to understand the reason behind the demand.
- Make payment before the deadline to avail of the interest waiver.
📣 Final Thoughts
This proactive step by the CBDT shows sensitivity toward taxpayers who may be caught in the crossfire of technical mismatches between new and existing tax provisions. While the responsibility for accurate tax computation lies with both taxpayers and the system, such compassionate policy decisions go a long way in fostering trust and compliance.
As we move toward more automation and real-time tax systems, it’s encouraging to see administrative flexibility in handling genuine cases of hardship. Taxpayers should treat this as a time-sensitive opportunity to avoid additional interest liabilities.
Stay informed, act timely, and consult a qualified tax professional if you receive a notice related to this matter.