Interest on Income Tax Refund

When you file your Income Tax Return (ITR), you may find that you have paid more tax than required. In such cases, the Income Tax Department refunds the excess amount. However, if the refund is delayed beyond a certain period, the taxpayer is entitled to receive interest on the refund amount. Understanding how interest on ITR refund works is crucial to ensure that you receive the correct amount.

What Is an ITR Refund?

An ITR refund occurs when the tax deducted or paid by a taxpayer exceeds the actual tax liability for the financial year. This happens due to reasons such as:

• Excess Tax Deducted at Source (TDS) by an employer or bank

• Advance tax payments exceeding actual tax liability

• Excess self-assessment tax paid

• Tax benefits or deductions not considered during TDS calculation

Once the Income Tax Department processes your ITR and confirms the excess tax paid, the refund amount is credited to your bank account.

When Does the Interest on ITR Refund Apply?

According to Section 244A of the Income Tax Act, 1961, the Income Tax Department is liable to pay interest on your refund if:

• The refund arises due to excess advance tax or TDS deducted.
• The refund amount is more than 10% of the total tax paid.
• The refund is delayed beyond a specific period (typically after the end of the financial year in which the tax was paid).

How Is Interest on ITR Refund Calculated?

The interest on an ITR refund is calculated as follows:

Interest Rate: The interest rate applicable is 0.5% per month or 6% per annum.

Time Period: Interest is calculated from April 1 of the assessment year until the date the refund is granted.

Rounding Off: Interest is rounded off to the nearest multiple of Rs. 10.

When Will You Not Receive Interest on Refund?

Interest on ITR refund is not applicable in the following cases:

• If the refund amount is less than 10% of total tax liability.
• If the refund is due to an appeal filed by the taxpayer.
• If the refund is processed before April 1 of the assessment year.

Taxability of Interest on ITR Refund

The interest received on an ITR refund is taxable under the head ‘Income from Other Sources’. You must declare this income while filing your return for the year in which the refund was received.

Example:

If you received an interest of Rs. 1,000 on your ITR refund, you must include this amount in your taxable income and pay tax as per your applicable slab rate.

Conclusion

Interest on ITR refund ensures that taxpayers are compensated for delays in receiving their excess tax payments. However, it is essential to check your refund status regularly and ensure the correct interest amount is credited. If your refund is delayed beyond the due period, you can take steps to claim your rightful interest. Always include the interest earned on the refund in your taxable income to avoid any compliance issues.

1. How long does it take to receive an ITR refund?

It usually takes 30-45 days after ITR processing for the refund to be credited. However, it may take longer if there are discrepancies in the return.

2. Will I receive interest on my ITR refund?

Yes, if your refund amount is more than 10% of your total tax paid, the Income Tax Department will pay interest at 6% per annum.

3. Is interest on ITR refund taxable?

Yes, the interest earned on the refund is taxable under ‘Income from Other Sources’, and you must declare it in your ITR.

4. What if my refund amount is incorrect?

If you receive a lower refund than expected, file a rectification request under Section 154 on the e-filing portal.

5.  Can I claim interest if my refund is delayed?

Yes, if your refund is delayed beyond the specified period, you are entitled to receive interest on the refund amount.