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Interest Income on Income Tax Refunds

An Assessee is eligible to claim refund of the excess tax paid by him. Tax could be paid in the form of advance tax or tax deducted/collected at source or self - assessment tax or payment of tax on regular assessment. To claim refund, an assessee need to E - file Return of Income submitting the proof of payment of taxes like Advance Tax, TDS/TCS etc. An Assessee can also claim tax refund even if return is filed after the due date.

CA Soniya Agarwal

An Assessee is eligible to claim refund of the excess tax paid by him. Tax could be paid in the form of advance tax or tax deducted/collected at source or self – assessment tax or payment of tax on regular assessment.

To claim refund, an assessee need to E – file Return of Income submitting the proof of payment of taxes like Advance Tax, TDS/TCS etc. An Assessee can also claim tax refund even if return is filed after the due date.

We earn simple interest on refund only if refund amount is at least 10% of the actual tax liability before tax deducted at source (TDS) as determined under section 143(1) or tax determined under regular assessment.The rate of simple interest is 0.5% per month or 6% per annum.

If Refund is arising due to Advance Tax, TDS/TCS: – Interest shall be allowed for a period commencing from the 1st day of April of the assessment year to the date on which the refund is granted.

If Refund is arising due to other reason: – Interest shall be allowed for a period from the date of payment of tax to the date of grant of refund.

The interest earned on tax refunds is chargeable to tax under the head “income from other sources”.

Paying extra tax and getting it back by way of refund is not a good choice because the interest earned is merely 6% pre-tax , however if the same money have been invested in other instruments, such as fixed deposits, it could have fetch 9-10% pre-tax . Further, claiming very high amount of tax refund may also increase the chances of getting Income return selected for scrutiny assessment.

After giving intimation to the assessee in writing, Department may set off any tax demand remaining payable against the amount to be refunded.

Categories: Income Tax

View Comments (1)

  • Thanks.
    The criteria of refund payment of being at least 10% of tax liability is new information learnt here for me.

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