Under section 244A of the Income Tax Act, interest on tax refunds is payable at 0.5% per month from either April 1 of the assessment year (if returns are filed on time) or the date of filing/payment (for late filings or self-assessment tax), until the refund is processed, unless the refund amount is less than 10% of the assessed tax, in which case no interest is granted. The provision applies to refunds from TCS, advance tax, self-assessment tax, and other payments, with interest calculated for each month or part thereof during the eligible period.
Is the Income Tax Refund Itself Taxable?
The principal amount of your income tax refund is not taxable since it simply represents a repayment of your own overpaid taxes.
However, any interest received from the Income Tax Department on this refund amount is considered taxable income and must be reported in your tax return.
Why You Get Interest on Your Income Tax Refund?
The Income Tax Department pays the interest, when they hold onto your excess tax payment for a certain period. The main purpose is to compensate the taxpayer for the delay in returning their overpaid funds.
| Also Read - ITR Refund Time For AY 2025-26 |
How to Report the Interest on ITR?
This interest income is taxable under the head "Income from Other Sources."
The interest component of your tax refund is treated as "Income from Other Sources" and is subject to taxation at your regular income tax slab rate. This interest income must be included in your total taxable income when filing your ITR.
How Interest on Income Tax Refund is Calculated?
Under Section 244A of the Income Tax Act, 1961, the tax department pays refund interest at 0.5% per month (6% annually) from the prescribed due date until the refund issuance date, with the interest amount being taxable as 'Income from Other Sources' while the principal refund amount remains tax-exempt.
Period of Interest Calculation
The interest calculation period depends on your filing timeliness:
For returns filed by the due date, interest runs from April 1st of the assessment year until refund disbursement.
Late filings (i.e., return is filed after the due date) only accrue interest from the actual filing date onward.
Why no Interest Received on Tax Refunds?
No interest is payable on tax refunds when either:
- the refund amount is below 10% of your total tax liability, or
- the refund is less than ₹100, as per the Income Tax Act provisions.
FAQs
Interest on income tax refund is kind of compensation that is paid by the IT Department to a taxpayer on the amount of tax refund due. This interest is provided as the taxpayer has had to wait for some days to receive the refund after filing their ITR.
Yes, the interest received on the tax refund is taxable at is considered income.
If you have received any interest on your income tax refund, you must disclose it under the head ‘Income from Other Sources’ when filing your ITR. It will be taxed in the Financial Year in which you received the interest from the income tax department.
CAclubindia
