The term ‘tax refunds’ won’t be new to taxpayers. Whenever the amount of tax paid is greater than the total tax liability, a refund is due. In a lot of cases, the taxpayer might receive more than the amount of income tax refund due. This is because, under certain conditions, the refund is paid with interest.
Rules for interest on refund of income tax
According to Section 244A,
- There is no interest payment on a refund that is lesser than 10% of total tax liability.
- If there is a delay because of the taxpayer, then the period of such delay is not considered in the calculation of interest.
- Interest on an income tax refund is taxable. Hence, it has to be included in the total gross income during filing of income tax returns for the year when such interest is received.
- Simple interest method is used to calculate interest on refund of income tax. The interest rate is 0.5% per month or 6% p.a.
How is the period for interest calculation determined?
- If the refund consists of excess TDS or advance tax,
1. If income tax returns are filed by the due date, the period will start on April 1st of the assessment year which is relevant and will continue till the refund is given.
2. If income tax returns are not filed by the due date, interest period will start on the day of filing of returns and continue till refund is given.
- If the income tax refund consists of extra self-assessment tax, the period will start from the date when returns are filed or when tax is paid, whichever date is later to the date of giving the refund.
Interest payment in case of extra refund
The assessee might be paid a higher refund than what they were eligible for. Under Section 234D of the Income Tax Act, the extra amount can be recovered by the IT department with interest. This recovery is done during the regular assessment done by the department which happens after the initial assessment. Regular assessment is a review of the returns filed by the taxpayer.
The period of interest on refund of income tax payable by taxpayer starts on the day of the granting of refund and ends on the date of regular assessment. The interest is calculated with simple interest method at the rate of 0.5% per month or 6% p.a.