Sections 220 and 221 of Income Tax Act: Tax Demand, Default, Interest and Penalty

Sections 220 and 221 of the Income Tax Act, 1961 governed payment of amounts specified in a notice of demand, interest for delayed payment, circumstances in which an assessee was treated as being in default, and penalty for default. These provisions remain important for demands and proceedings governed by the 1961 Act.

Current law from 1 April 2026: The Income Tax Act, 2025 is in force from 1 April 2026. The corresponding provisions are Section 411, dealing with payment of demand, interest and default, and Section 412, dealing with penalty when tax is in default. Outstanding liabilities under the Income Tax Act, 1961 continue to be payable and may be recovered after commencement of the 2025 Act.

Section 220 - When tax is payable and assessee deemed in default

30-day period for payment of demand

Under Section 220(1), an amount other than advance tax specified as payable in a notice of demand under Section 156 is ordinarily required to be paid within 30 days from service of the notice. Where the Assessing Officer has reason to believe that allowing the full period would be detrimental to the revenue, a shorter period may be specified with the previous approval required by the section.

Demand during appeal or other proceedings

Section 220(1A) provided for continuation and validity of a notice of demand where an appeal or other proceeding was filed or initiated in respect of the amount demanded, subject to the statutory framework governing continuation and validation of recovery proceedings.

Interest for delayed payment

Section 220(2) imposed simple interest at 1 per cent for every month or part of a month on an unpaid demand after expiry of the permitted payment period, running until the amount was paid. The section also provided for consequential adjustment of interest where the underlying demand was reduced or subsequently increased by specified orders.

Reduction or waiver of interest

Section 220(2A) empowered the specified Principal Chief Commissioner, Chief Commissioner, Principal Commissioner or Commissioner to reduce or waive interest where the statutory conditions were satisfied. These included genuine hardship, default caused by circumstances beyond the assessee's control, and cooperation by the assessee in the relevant inquiry or recovery proceeding. The provision also contained procedural safeguards concerning disposal of the application and opportunity of hearing before rejection.

Prevention of duplicate interest

Sections 220(2B) and 220(2C) prevented interest under Section 220(2) from being charged on the same amount for the same period where the specified interest had already been charged under the relevant TDS or TCS provisions.

Extension of time and payment by instalments

Under Section 220(3), an assessee could apply before expiry of the due date for extension of time or permission to pay the demand by instalments. The Assessing Officer could grant such relief subject to appropriate conditions.

When default arises

Under Section 220(4), failure to pay within the original or extended period resulted in the assessee being deemed in default. Where instalments had been allowed and an instalment was not paid on time, Section 220(5) treated the assessee as in default for the whole outstanding amount in accordance with the provision.

Disputed demand during appeal

Section 220(6) permitted the Assessing Officer, in the circumstances specified by the provision and subject to conditions, to treat an assessee as not being in default in respect of an amount disputed in appeal while the appeal remained pending.

Income subject to foreign remittance restrictions

Section 220(7) contained protection where tax related to income arising outside India in a country whose laws prohibited or restricted remittance to India. Subject to the statutory conditions, the assessee was not to be treated as in default for the relevant part of the tax until the restriction was removed.

Section 221 - Penalty payable when tax is in default

Where an assessee was in default or deemed to be in default in payment of tax, Section 221 permitted the Assessing Officer to impose a penalty in addition to arrears and applicable interest. In a continuing default, further amounts could be directed, but the total penalty could not exceed the tax in arrears.

A reasonable opportunity of being heard was required before penalty could be levied. No penalty was to be imposed where the assessee proved to the satisfaction of the Assessing Officer that the default occurred for good and sufficient reasons. Payment of the tax before levy of penalty did not, by itself, extinguish penalty liability. If a final order wholly reduced the tax underlying the default, the penalty was required to be cancelled and penalty already paid refunded.

Sections 411 and 412 of Income Tax Act 2025

Corresponding current provisions: Section 411 of the Income Tax Act, 2025 substantially carries forward the framework concerning payment of demand, interest for delay, instalments and default. Section 412 carries forward the penalty framework for an assessee in default, including the ceiling that total penalty cannot exceed tax in arrears, the right to a reasonable opportunity of hearing, and protection where good and sufficient reasons for default are established.

For a tax liability arising under the old Act, the fact that the Income Tax Act, 2025 has commenced does not by itself extinguish the liability. The Income Tax Department has clarified that outstanding old-law demands remain payable and can be recovered using the recovery framework available under the new Act.

Official references

The applicable Act, tax period, notice of demand, appellate status and any order granting stay or instalments should be examined before determining default, interest, recovery or penalty consequences.