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What to Do If You Receive an Excess Income Tax Refund: A Simple Guide

Rashmi , Last updated: 25 August 2023  

In recent years, the Income Tax Department has been processing income tax returns (ITR) faster. However, this speedy process has led to some issues. When ITRs are processed quickly, taxpayers might not have enough time to correct mistakes they made in their original returns. This situation can lead to problems, like receiving a larger tax refund than deserved. If this happens, here's what you can do:

1. Recognize the Issue

If you forget to include certain taxable incomes in your initial ITR and receive a higher tax refund than expected, you're in a situation where you've received excess money.

What to Do If You Receive an Excess Income Tax Refund: A Simple Guide

2. Act Before a Notice Arrives

If you haven't yet received an income tax notice about the excess refund, tax experts recommend taking quick action. You should file a revised ITR promptly and return the extra refund before the tax department contacts you.

3. Filing a Revised ITR 

When you've received an excess tax refund, you can file a revised ITR to give back the extra amount before the income tax department sends you a notice. This action helps you avoid losing the chance to make corrections.

4. Possible Consequences of Ignoring the Issue

If you ignore the excess refund issue and the tax department finds out later, you could face penalties. The department might issue a tax notice under different sections like 143(3), 147, or 144. This could lead to additional interest penalties as well.

5. Penalties and Interest 

To return the excess tax refund, you'll need to file a revised ITR. However, you might also have to pay penal interest, regardless of whether you've received a notice or not. Penal interest is charged at a rate of 0.5% per month on the portion of the refund that wasn't actually owed to you. This refund and interest can be paid through the e-pay facility of the e-filing portal.


6. Additional Tax Liability 

In some cases, while filing the revised ITR, you might find that you owe more taxes than the refund you initially received. If this happens, you could be liable to pay interest under sections 234B and 234C.


7. Importance of Returning Excess Refunds

If you've received an excess refund, it's essential to repay it as soon as possible, even if you haven't received a notice yet. Incorrect claims or omissions could be considered misreporting of income, leading to penalties of up to 200% of the tax under section 270A. In severe cases, this could even lead to legal actions against you.

In conclusion, if you find yourself in a situation where you've received an excess income tax refund, it's crucial to take immediate action. Filing a revised ITR and returning the excess amount, along with any penal interest, can help you avoid penalties and legal issues down the road.

The author is a Chartered Accountant with 2 decades of experience into Accounting, Taxation, Auditing, Risk & Compliance, Credit Controls, Due diligence. Currently, the author is the founder and managing partner at RRL Global Services. She can also be reached at rrlglobal@yahoo.com

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Category Income Tax   Report



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