An income tax refund does not typically come with interest payable or penalties. There is another concept underlying the fact of granting interest on a refund of income tax. The refund is basically the excess tax paid during a financial year that is returned. In case the refund processing is delayed, the Income Tax Department has gone to the length to pay interest to the taxpayer as compensation.

According to Section 244A of the Income Tax Act, 1961, interest is calculated by itself once the refund is generated.

Why Does the Interest on Income Tax Refund Offer to be Higher?

Delays in refunds could be due to a variety of reasons:

Pending authentication of e-return
Mismatch of TDS particulars
Processing delays
Filing errors

To render the system fair, it is built into the tax laws that a taxpayer shall be entitled to interest for delayed refunds.

What makes this facility even more appealing is the fact that a taxpayer does not have to file a separate application in order to receive the interest. The interest is paid along with the principal of the refund amount itself.

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Which Section of the Act Deals with the Payment of Refund Interest?

Under Section 244A of the Income Tax Act, the refund interest is to be paid. It covers:

The rate of interest
The period for which interest is payable
The conditions under which interest is allowed

What is the Rate of Interest on Income Tax Refund?

The current interest rate is as follows:

0.5% per month (or part of a month)
Equivalent to 6% per annum

Interest shall be charged on the refund at a fixed rate.

How Is the Interest on Income Tax Refund Calculated?

The calculation of interest on income tax refund depends on the manner through which the excess tax has been paid.

1. Excess Tax Paid through TDS or Advance Tax

The interest is calculated:

From the first day of the assessment year, or
From the day of filing the return (if the return is filed subsequent to the due date)

Up to the day on which the refund is made.

2. Excess Tax Paid through Self-Assessment Tax

The interest is calculated:

From the date of actual payment of Self-Assessment Tax
Up to the day on which the refund is made

Example

Suppose that:

Excess Tax Payment: ₹50,000
The money is repaid after six months

Refund interest is calculated at 0.5% for six months, which equals ₹1,500.

Is the Interest on Income Tax Refund Taxable?

Yes, it is.

Many taxpayers assume that it is free of tax since it is earned from the government. This assumption is incorrect.

The interest part:

Is fully taxable
Is income from other sources
Is taxable when received

The amount of the refund itself is not taxable, but the interest becomes income and liable for tax.

Failure to disclose such interest might attract tax notifications or minor adjustments.

How to Determine Refund Interest Amount?

Check the interest credited by:

Signing on to your IT portal and viewing refund details under filed returns
Checking Form 26AS/ AIS

The interest will specifically be mentioned under Section 244A.

Key Points to Remember

Interest accrues automatically
Even part of a month is considered a whole month
If the amount to be refunded does not exceed 10% of the total tax liability, the tax department will not pay any interest
The period of interest on refund may be reduced due to delay attributable to the taxpayer

Conclusion

Interest on income tax refund is a statutory award sanctioned under Section 244A to be paid along with refunds which are late in issuance. They are awarded on a monthly basis at the rate of 0.5% and are paid automatically by the Income Tax Department.

While the refund itself is not taxed, the interest accrued is taxable in the year it is received. Understanding this helps to ensure the correctness of compliance and leads to accurate tax reporting.

Frequently Asked Questions (FAQs)

What is the rate of interest on income tax refund?

The rate of interest is 0.5 percent every month, that is 6 percent per annum.

Is refund interest automatically credited?

Yes, refund interest is credited automatically.

Is interest on income tax refund taxable?

Yes. It is taxable under “Income from Other Sources”.

When would interest be available for the refund?

The interest depends upon the payment of tax. In the case of TDS/advance tax, the interest is usually calculated from the first day of the relevant assessment year. In the case of self-assessment tax, the interest is calculated from the date of payment.

Is the refund amount itself taxable?

No. The refund amount is not taxable, but interest on the refund amount is taxable.

What occurs if refund interest is not reported?

There could be assessment adjustments or notices from the Tax Department.

Is interest paid if the refund amount is very small?

Interest is not paid if the refund is lower than 10% of the total tax liability.

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