Taxpayers may sometimes end up paying more tax than what is ultimately payable for a particular year. This can happen through advance tax, TDS/TCS, self-assessment tax or tax paid following a regular assessment. In such cases, the Income-tax Act, 2025 provides a mechanism for claiming a refund of the excess amount paid.
The Income Tax Department's guidance on refund provisions covers the eligibility to claim a refund, the procedure for filing the claim, interest on delayed refunds, refund arising from appellate orders and situations where the department can adjust or withhold a refund.
When is a taxpayer entitled to a tax refund?
Under Section 431, a taxpayer becomes entitled to a refund when the tax paid by, or on behalf of, the taxpayer exceeds the amount actually payable for that year. The excess may relate to advance tax, tax deducted or collected at source, self-assessment tax or tax paid following a regular assessment.
The general rule is that the person who paid the tax is entitled to claim the refund. However, Section 432 also provides for certain special situations.
For example, where the income of one person has been included in another person's total income under the clubbing provisions, the latter may be entitled to claim the corresponding refund. Similarly, where a taxpayer is unable to claim or receive a refund because of death, incapacity, insolvency, liquidation or another cause, the legal representative, trustee, guardian or receiver may claim or receive it on the taxpayer's behalf.
How can a taxpayer claim an income tax refund?
Section 433 provides that a refund claim has to be made by furnishing a return of income under Section 263. In other words, taxpayers generally claim their refund through the income tax return.
A refund can be claimed through:
- Original return
- Revised return
- Belated return
However, the guidance states that a refund cannot be claimed through an updated return. If the taxpayer misses the relevant deadline for filing a belated or revised return, a condonation application may be made to the CBDT, subject to the prescribed conditions and guidelines.
Condonation of delay for refund claims
CBDT Circular No. 11/2024 dated October 1, 2024 provides guidelines for applications seeking condonation of delay in filing returns claiming refunds or carry-forward of losses.
The monetary limits for deciding such applications are divided among different tax authorities. Claims up to ₹1 crore for an assessment year fall within the powers of Principal Commissioners/Commissioners of Income-tax. Claims exceeding ₹1 crore but not exceeding ₹3 crore are handled by Chief Commissioners, while claims above ₹3 crore are considered by Principal Chief Commissioners.
A condonation application for a refund or loss claim generally cannot be entertained beyond five years from the end of the relevant assessment year. The guidance also states that the competent authority should, as far as possible, dispose of such an application within six months from the end of the month in which it is received.
The taxpayer must also demonstrate that there was a reasonable cause for not filing the return within the prescribed time and that genuine hardship exists on the merits of the case.
Refund arising from an appeal or other proceeding
A taxpayer may also become entitled to a refund as a result of an appellate or other proceeding.
Under Section 435, where a refund becomes due because of an order passed in appeal or another proceeding under the Act, the Assessing Officer is generally required to issue the refund without the taxpayer having to make a separate claim.
There are specific rules where an assessment has been set aside, cancelled or annulled. For instance, where a fresh assessment has been directed, the refund becomes due after that fresh assessment is completed.
Interest on delayed income tax refunds
Delay in receiving a refund may entitle the taxpayer to interest under Section 437.
Where the refund arises from TDS/TCS or advance tax, interest is calculated at 0.5% for every month or part of a month, subject to the prescribed conditions. Where the return is filed within the specified due date, the interest period generally begins from April 1 of the assessment year; otherwise, it runs from the date of filing the return until the refund is granted.
For refunds arising from self-assessment tax, interest is also calculated at 0.5% per month or part thereof. The interest period starts from the later of the date of filing the return or payment of tax and continues until the refund is granted. However, no interest is payable where the refund is less than 10% of the tax determined under the specified provisions or regular assessment.
Additional interest where refund is delayed after an appeal order
A separate additional interest provision applies where a refund arises because of specified appellate or other orders and is not granted within the prescribed period.
If the refund is delayed beyond the period prescribed under Section 286(1), the taxpayer may be entitled to additional interest at 3% per annum for the period beginning after expiry of the prescribed time until the refund is granted.
The prescribed period is three months from the end of the month in which the relevant order is received by the Commissioner of Income-tax, as stated in the departmental guidance.
When can the tax department withhold or adjust a refund?
A refund is not always paid directly to the taxpayer. Where there is an outstanding tax demand, Section 438 permits the authorised tax authorities to set off the refund, wholly or partly, against the amount payable by the taxpayer.
However, the taxpayer must first be given written intimation of the proposed adjustment.
The Assessing Officer may also withhold a refund in specified circumstances where a notice has been issued and the officer believes that releasing the refund could adversely affect revenue. Such withholding requires prior approval of the Principal Commissioner or Commissioner.
When is interest not payable on a delayed refund?
The taxpayer may lose interest for the period of delay attributable to the taxpayer or the deductor. The departmental guidance states that where proceedings resulting in the refund are delayed wholly or partly because of the taxpayer or deductor, the corresponding period is excluded while calculating interest.
Key takeaways for taxpayers
The refund provisions under the Income-tax Act, 2025 are particularly relevant for taxpayers who have paid excess advance tax, TDS/TCS or self-assessment tax.
The key points to remember are:
- Excess tax paid over the actual tax liability can generally be claimed as a refund.
- Refunds are normally claimed through the income tax return.
- Refund claims can be made through original, revised or belated returns, but not through an updated return.
- Delay in filing a refund claim may be condoned subject to prescribed conditions.
- Interest on eligible delayed refunds is generally calculated at 0.5% per month or part thereof.
- Certain appellate refunds can qualify for additional interest at 3% per annum if delayed beyond the prescribed period.
- Outstanding tax demands may be adjusted against a refund after the required written intimation.
- Interest may not be payable for delays attributable to the taxpayer or deductor.
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