What is Interest on Income Tax Refund: Eligibility, Calculation and Factors Affecting It
Taxpayers pay taxes to the Government of India through tax deducted at source (TDS), tax collected at source (TCS), self-assessment tax and advance tax. However, if the tax liability is lower than the tax paid, excess taxes paid is refunded. The Income Tax Department pays a certain interest on income tax refunds to taxpayers at a fixed rate. Individuals receive the interest component along with their refund.
But when can one be eligible for interest on Income Tax returns? How to calculate interest on ITR and what are the factors affecting it? Find the details right here!
What is Interest on Income Tax Refund?
Taxpayers receive interest on refunds from Income Tax Department after the processing of their returns is complete. The rate of interest on refunds arising due to excess payment of TDS, TCS, and advance tax is 0.5% every month or part of the month. This rate is applicable from April 1 of an assessment year till the date of grant of refund. It will only be applicable when an individual has filled his/her returns within the due date as notified by the IT Department.
One receives interest on refund under Section 244A of the Income Tax Act. This Section came into effect from AY 1989-90, and it replaced Section 214, which allowed interest on refunds only when such refunds arose as a result of advance tax payment.
When can one Get Interest on Tax Refunds?
A taxpayer can get refunds when they make tax payments worth more than their total tax liability. Here are cases in which one is eligible for interest:
Interest on Refund of Advance Tax, TCS or TDS
Individuals who have paid excess tax as a part of TCS (Tax Collected at Source) under Section 206 or excess tax as a part of advance tax payment or TDS deductions under Section 199 are eligible for receiving interest from tax authorities. The interest is payable at the rate of 0.5% per month for the following period:
- Starting from April 1 of the specific assessment year until the grant of refund is given that one has filled the return within the stipulated due date as per Section 139(1).
- Date of furnishing ITR till the date of grant of refund (This excludes the above scenario.)
Interest on Refund of Self-Assessment Tax
One is also eligible for interest when an individual pays excess self-assessment tax to the government. It is also applicable at the rate of 0.5% per month or part month, as the case may be. Authorities compute interest from the date of ITR filling or the date on which one pays taxes until the date of refund initiation.
Other Situations of Excessive Tax Payment
Apart from the above-mentioned scenarios, if one is eligible for a refund, interest shall be credited at the rate of 1.2% per month. This covers the date of tax payment or any penalty until the date of grant of refund.
No Interest in Some Cases
The taxpayer would not receive any interest if proceedings got delayed due to the assessee or deductor. In these cases, the delay period will be excluded from the period for which such interest is payable. Any questions regarding these are answered by the Principal Chief Commissioner, Chief Commissioner or Principal Commissioner as the case may be, and their decision shall be final.
Interest on an income tax refund is not allowed in case of delay on the part of the assessee or deductor.
How to Calculate Interest on Income Tax Refund?
Tax authorities calculate interest on tax refunds in these ways:
- Calculation of interest on a monthly basis
Interest that one receives for a fraction of a month includes the calculation of interest taking into account the entire month.
- Calculation on an annual basis
Interest that the IT Department calculates on an annual basis gets rounded off to a full month. Interest is then computed on rounded-off months.
- Amount rounded off to one hundred.
Any interest payable to taxpayers gets rounded off to the nearest multiple of a hundred. Fractions of 100 are not considered, and only a rounded off amount shall be considered for interest payment.
Also Read: E-Verify ITR Through Income Tax Electronic Verification Code
Factors Impacting Interest on Income Tax Refunds
Here are some factors that impact income tax refund:
- Timely Filing
Individuals are only eligible for a refund if they fill their ITR within the due date notified by IT Department. Taxpayers who miss out on filling their returns within due date will miss out on refunds and hence the interest component that comes with it.
- Refund Amount
Taxpayers will get interest on refunds only when the refund amount is more than 10% of the total tax paid. When the refund amount is less than 10%, no interest shall be payable by the IT Department to taxpayers.
Who is Eligible for Interest on Tax Refunds?
All residents are eligible for interest on tax refunds if they file their returns within due dates. The option of interest on income tax refunds for NRIs is also available if they file their returns timely and their refund amount is more than 10% of the total taxes paid.
Also Read: Income Tax Calendar: Due Dates and TDS for AY 2022-23
Final Word
Interest on an income tax refund is available for all types of excess taxes paid. However, individuals must file their ITR before the due dates to be eligible for interest payments. The longer the time it takes for refund initiation, the more will be interest amount and vice versa.
FAQs on Interest on Income Tax Refund
Ans: Follow these steps to check the refund status:
Step 1: Log in to the E-filing portal of IT Department with user credentials.
Step 2: Visit my account section and select Refunds/Demands.
Step 3: Taxpayers can see refund status on their screen.
Ans: Interest earned on a tax refund is taxable. The interest component comes under income from other sources, and taxpayers need to include this while computing their gross total income for the financial year.
Ans: Individuals receive a refund when their actual tax liability is lower than the taxes paid. However, upon scrutiny at a later date, the IT Department can reduce the refund amount, or a nil refund may be due. In these cases, taxpayers are liable to pay interest at the rate of 0.5% per month for the excess refund paid to them.
Ans: Any refunds arising out of order of the High Court, Supreme Court or any Appellate Tribunal are also subject to interest payments. Therefore, apart from interest received on such refunds at normal rates, an additional rate of 3% p.a. is also included while calculating interest receivable by taxpayers.
Ans: There may be cases when one receives lower refunds than claimed. It may be due to the fact that the IT Department may adjust outstanding taxes from the past year against refunds that they are crediting. Taxpayers have a time of 30 days to appeal against the action, or else the IT Department will proceed with it.
Disclaimer
This article is solely for educational purposes. Navi doesn't take any responsibility for the information or claims made in the blog.
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