Interest on Income Tax Refund - Taxable or Not

This article will help you understand the Taxability of Interest on Income Tax Refunds. When a taxpayer has paid an excessive tax than what he is liable to pay, the assessee is eligible to claim the excess tax paid as a refund. The excess tax paid can be in the form of Advance Tax (AT), Tax Deducted at Source (TDS) or Self-Assessment Tax(SAT). The taxpayer has to wait for some days after filing the income tax return to receive an income tax refund. 

If the refund amount is at least 10% of the tax paid, interest of 6% per annum is provided along with refund. If the returns are filed within the tax filing due date (15th September for FY 2024-25), interest amount will be calculated from 1st April of the financial year to the date of payment of TDS refund. However, if the returns are filed after the due date, the interest will be calculated from the date of filing the return to date of payment of TDS refund. 

What is an Income Tax Refund?

• Income tax refund, also known as IT refund, arises in cases in which the tax paid by an Assessee is higher than the amount he is liable to pay. 
• However, the claim of an income tax refund by a taxpayer through ITR is not final and must be verified by the Income Tax Department.

Rate of Interest

• Interest at 6% per annum is paid on income tax refund amount. However, if the refund amount is less than 10% of the tax paid, or within Rs.100, no interest is paid on refund.
• Illustration: For example, Mr. Anil has an income tax liability of Rs.60,000. Total taxes paid by him, including TDS, Advance Tax and SAT, is Rs.80,000. The excess tax paid of Rs.20,000 (Rs.80.000 (minus) Rs.60,000) is claimed as a refund by Mr. Anil while filing his income tax return. Mr. Anil will receive a refund of Rs 20,000 along with interest. If the refund was received in the month of September, interest @ 0.5% per month for 6 months will be received (April to Sept).

Period of Interest

• If the return is filed on or before the due date u/s 139(1): Interest begins from 1 April of the assessment year till the date of grant of refund.
• If the return is filed after the due date u/s 139(1): Interest begins from the date of return filing to the date of grant of refund.

Taxability of Income Tax Refund

The Income tax refund is not regarded as income and does not attract any tax liability. It is already taken into consideration while filing the ITR, Therefore, it is not considered as income and is not chargeable to tax.

Taxability of Interest on Income Tax Refund

The interest on income tax refund is liable to tax under the head ‘Income from Other Sources’. The interest has to be included in the income tax return in the Financial Year in which the refund was received. Any TDS, if deducted on the interest on income tax refund should be claimed against the total tax liability.

How to Report the Interest on Income Tax Refund in ITR? 

If you have received any interest on the income tax refund then you will have to disclose it under the head “Income from Other Sources” while filing your ITR. It will be taxed in the year you receive the interest from the income tax department.