When you receive a tax refund from the Income Tax Department, you may also receive interest on that refund if it was delayed. However, this interest isn’t just a bonus — it comes with specific rules and tax implications you must understand.
1. What Is Refund Interest and When Is It Payable?
Under Section 244A of the Income Tax Act, if the tax department delays issuing your refund, you are usually entitled to receive simple interest at 0.5% per month (or 6% per year) on the tax amount refunded. The interest is calculated from either:
· 1 April of the assessment year if you filed your return on time,
· Or the date you filed your return, if you filed it after the due date.
This interest compensates you for the delay in returning your excess tax to you.
2. Interest Is Taxable as “Income from Other Sources”
Although you receive interest along with your refund, this interest amount is not tax‑free. It must be declared under the head “Income from Other Sources” in your income tax return for the year in which you actually receive the interest.
This means:
· You include the interest amount in taxable income,
· It is taxed at your applicable tax slab rate,
· You cannot treat it as a deduction — but you must report it.
3. You Only Get Interest If Certain Conditions Are Met
Not all refunds earn interest — the law sets conditions for eligibility:
✔ Refund Amount Must Be Significant
Interest is not payable if the refund is less than 10% of your total tax liability for that year.
This means that small refunds often won’t earn interest.
✔ No Interest for Taxpayer‑Caused Delays
If you caused the delay (for example, by filing late, submitting incomplete information, or delaying e‑verification), the period attributable to you is excluded from interest calculation.
In simple terms, the government only pays interest for the delay it is responsible for.
4. Different Situations Affect How Interest Is Calculated
Interest isn’t always calculated the same way. It depends on why the refund is due:
· Refund from TDS, TCS, or Advance Tax — interest counted from 1 april or filing date.
· Refund from Self‑Assessment Tax — interest counted from filing or tax payment date, whichever is later.
Also, interest may be paid only from the date the refund becomes due and not for periods where the taxpayer slowed down the process.
*5. Even If You Don’t Get Interest, There’s No Penalty for Not Reporting It
There has been legal clarification that if you fail to disclose interest received on a tax refund, you may not necessarily face a penalty. A tribunal ruled that since the interest element is not known until the refund is received, non‑disclosure by a taxpayer before that shouldn’t be penalised.
That said, accurately reporting any interest you do receive is still important to stay compliant with tax laws.
Summary – What Every Taxpayer Should Remember
Rule
Key Point
1. Refund interest is legally mandated
Income Tax Act Section 244A provides interest if refund is delayed.
2. Interest is taxed
Interest is reported under Income from Other Sources.
3. Conditions must be met
Refund must exceed 10% of tax liability, and taxpayer delays exclude interest.
4. Calculation varies
Different rules exist for TDS, advance tax, and self‑assessment cases.
5. Reporting is essential
Disclose the interest received in your ITR to avoid issues.
Disclaimer:
The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of any agency, organization, employer, or company. All information provided is for general informational purposes only. While every effort has been made to ensure accuracy, we make no representations or warranties of any kind, express or implied, about the completeness, reliability, or suitability of the information contained herein. Readers are advised to verify facts and seek professional advice where necessary. Any reliance placed on such information is strictly at the reader’s own risk.
click and follow Indiaherald WhatsApp channel