The Indian Income Tax Department pays interest on income tax refunds at the rate of 6% per annum under Section 244A of the Income Tax Act, 1961, to compensate taxpayers for the delay.
When a taxpayer pays more income tax than what is legally due, the Income-tax Act, 1961 provides relief by way of interest on the excess amount refunded. This interest compensates the taxpayer for the period during which the government retained money that was not payable. The law governing this interest is contained in Section 244A of the Income-tax Act.
This article explains when interest on income tax refund is payable, how it is calculated, exceptions, taxability, and common practical issues, in simple and clear terms.
Legal provision for interest on Income Tax refund
Section 244A of the Income-tax Act provides that where a refund of any amount becomes due to the assessee, the assessee is entitled to receive simple interest on such refund. The provision applies to refunds arising from:
- Excess advance tax paid
- Excess tax deducted at source (TDS)
- Excess tax collected at source (TCS)
- Self-assessment tax
- Tax paid during assessment or reassessment proceedings
The objective of this provision is to ensure that taxpayers are compensated for the time value of money when refunds are delayed.
Rate of interest on income-tax refund
The rate of interest prescribed under Section 244A is:
- 0.5% per month or part of a month, which is equivalent to
- 6% per annum (simple interest)
Even a fraction of a month is considered a full month for the purpose of interest calculation.
From which date is interest on Income Tax Refund calculated?
The starting point for calculation of interest depends on the nature of tax paid:
(a) Refund of TDS, TCS, or advance tax
Interest is calculated from 1 April of the assessment year until the date the refund is actually granted.
(b) Refund of self-assessment tax or tax paid after filing return
Interest is calculated from the date of payment of such tax until the date the refund is granted.
In all cases, interest is calculated up to the actual date of refund credit, i.e., the date on which the amount is credited to the taxpayer’s bank account.
How interest on refund is calculated (with example)
Interest under Section 244A is calculated on a monthly basis.
Example:
- Refund amount: ₹1,20,000
- Date from which interest is payable: 1 March 2024
- Date of refund credit: 20 August 2024
Step 1: Calculate number of months
Even part of a month is counted as a full month.
March to August = 6 months
Step 2: Calculate interest
Monthly interest rate = 0.5%
Interest = ₹1,20,000 × 0.5% × 6
Interest = ₹1,20,000 × 0.005 × 6
Interest = ₹3,600
Thus, the taxpayer is entitled to ₹3,600 as interest on the refund.
Additional interest in case of appellate orders
Where a refund arises as a result of an appeal, revision, or court order, and the tax department fails to give effect to such order within the prescribed time, the law provides for additional interest.
In such cases an additional 3% per annum interest may be payable. This additional interest is over and above the standard 6% interest. It applies only for the period of delay beyond the prescribed time limit
This provision is meant to discourage unnecessary administrative delays after appellate relief has been granted.
When interest on refund is not payable
Interest on income-tax refund is not automatic in every situation. It may be denied in the following cases:
- When the delay in processing the refund is attributable to the taxpayer, such as failure to respond to notices or submit required information
- When proceedings are delayed due to incorrect or incomplete details provided by the assessee
- In certain special cases covered by departmental instructions or statutory exclusions
If the delay is caused by the taxpayer, the period of such delay is excluded from interest computation.
Is Interest on income tax refund is exempt?
No, interest on income tax refund is exempt rather it is taxable under the head “Income from Other Sources”. It is taxable in the year in which the interest is received, not the year to which the refund relates. The interest amount must be disclosed separately in the income-tax return. The principal refund amount is not taxable, as it represents excess tax paid.
Adjustment of refund against outstanding dues
If the taxpayer has any outstanding tax demand:
- The refund (including interest) may be adjusted against such dues
- Only the net balance, if any, is released to the taxpayer
- Details of such adjustment are reflected in the refund intimation
What to do if interest is not paid or is short-paid
If interest on refund is not paid or appears to be incorrectly calculated, the taxpayer can:
- Verify refund details in the income-tax portal and refund intimation
- File a rectification request if interest has been omitted or miscalculated
- Raise a grievance through the income-tax grievance redressal system
- Approach the assessing officer where necessary
In appropriate cases, legal remedies such as appeal or writ petition may also be available.
Key takeaways
- Interest on income-tax refund is governed by Section 244A. The standard rate is 6% per annum, calculated monthly. Interest starts from the statutory date and runs till actual refund. Additional interest may apply in cases of delayed appellate refunds
- Interest received is taxable as income. Taxpayers should always verify refund and interest computations
