Due to any reason, in case the income tax department makes an excess refund to the taxpayer. Such taxpayer will have to return the excess refund along with interest payable under section 234D of the Income Tax Act. The present article helps to simplify the interest provisions of said section 234D read will rule 119A of the Income Tax Rules.

Tax refund concerning applicability of provisions of section 234D

The flow of tax refund and applicability of interest provisions is explained hereunder-

  • Initially, based on the processing of the income tax return, a refund may be granted to the taxpayer under intimation as per section 143(1),
  • Subsequently, the taxpayer can be subjected to scrutiny,
  • During the regular assessment, it may happen that the refund amount so granted under section 143(1) is either reduced or is totally nullified,
  • Accordingly, the refund so received by the taxpayer under section 143(1) needs to be paid back to the department.
  • Interest under section 234D is payable on such refund amount.

White card with text interest stands on the desk against the background

Provisions of section 234D of the Income Tax Act

Interest is chargeable under section 234D under the following situations-

1. Refund is granted under section 143(1), however, no refund is due as per regular assessment; or

2. The amount of refund granted under section 143(1) exceeds the amount refundable as per regular assessment.

Meaning of regular assessment-

Regular assessment, generally, means and covers-

  • An assessment under section 143(3) [scrutiny assessment]; or
  • An assessment under section 144 [best judgment assessment].

Notably, as per explanation 1 to section 234D, an assessment made for the first time under section 147 or section 153A will also be treated as regular assessment.

Rate of interest payable under the provisions of section 234D

In case the provisions of section 234D get attracted, the taxpayer will be liable to pay interest @0.5% per month or part thereof.

Period for which interest is chargeable under section 234D

The taxpayer will be liable to pay interest under section 234D from the date of granting of the refund amount till the date of regular assessment.

Amount on which interest is chargeable under section 234D

Interest under section 234D will be levied on the whole amount or the excess amount of refund.

Order adjustments allowed under section 234D

Interest chargeable under section 234D will be adjusted as a result of any of the following orders if the amount of refund granted under section 143(1) is held to be correct-

1. Section 154 – Rectification of mistake,

2. Section 155 – Other amendments,

3. Section 250 – Order of Commissioner (Appeals),

4. Section 254 – Order of Appellate Tribunal,

5. Section 260 – Judgement of High Court/ Supreme Court,

6. Section 262 – Hearing before Supreme Court,

7. Section 263 – Revision of orders which are prejudicial to the revenue,

8. Section 264 – Revision of other orders

Manner of computation of interest [rule 119A]-

Rule 119A of the Income Tax Rules briefs the manner of computation of interest. The same is detailed hereunder-

  • Interest calculation on annual basis-

The period of which interest is to be calculated will be rounded off to the whole month/ months. Accordingly, interest will be calculated for a period based on such rounded off month/ months.

  • Interest calculation on monthly basis-

Calculation of interest for a part of the month comprised in a period/ a fraction of month is to be done by considering the same as a full month.

Example – Suppose the period of levy of interest under section 234D is 3 months and 17 days. Then, in such a case, 17 days will be considered as a whole month. Accordingly, interest under section 234D will become payable for 4 months.

  • Rounding off of the amount of interest-

The amount on which interest is to be calculated will be rounded off to the nearest multiple of one hundred. Any fraction of INR 100 will be ignored and such rounded off amount will be considered for calculation of interest payable.

Example – Suppose, the taxpayer has received an excess refund amount of INR 10,640. Accordingly, for calculation of interest under section 234D, the amount of INR 40 will be ignored and interest will be calculated on INR 10,600.

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One Comment

  1. Vijay Kumar Dadoo says:

    Interest u/s 234 D, on account of Excess refund by Income Tax Department- It is unfair to charge any interest, or the maximum interest can be THE INTEREST PAYABLE BY SBI ON SAVINGS ACCOUNT.

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