Allowability of Interest paid under Incometax Act, 1961:

Presently, interest paid by the Government to an assessee is chargeable to tax. However, interest paid by the assessee to the Government under various sections is not allowed as deduction while computing the total income. Interest paid by the assessee is for the use of money by him and is compensatory in nature.

Interest paid by the assessees to the Government under various sections of the Income Tax Act should be allowed as deduction in computing total
income. If the assessee does not have business income, interest should be allowed under the head `Income from other Sources’. Alternatively, the interest received by the assessee on refund should be exempt from tax.

Source- Pre-budget Memorandum 2014 on direct taxes by ICAI

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  1. Rajesh, Mumbai says:

    Good suggestion. I draw attention to abnormality in rate of interest paid by IT Department on Refunds which is only 6% and interest charged by them which is very higher @ 15%. There should not be a difference of more than 3% in Interest paid and interest charged.This is one of the reason as to why Department delays refunds because they use our money at 6%.Suggestion must go for this to make it 12% and 15% respectively. Secondly I had come across a situation where my TDS payment was delayed only by 3 days (I paid on 10th in lieu of due date being 7th) and I had received notice to pay 4.5% interest (applicable for 3 months).Such draconian provisions which had taken birth out of Devil Mind, must be dropped.

  2. s sudarshana says:

    This is a valid point. In fact when an assessee takes loan on his own deposits and pays the interest while closing the loan account. Despite of this all interest earned is liable for tax. Rule should be amended to compute only the net interest received rather than gross interest received while computing the tax.

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September 2021