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. The assessee will receive interest on the refund for this period.

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. It is calculated as per various tax laws and sections of the Income Tax Act, 1961. 

A taxpayer may get back some of the tax paid by him/her during a financial year if he/she has paid more tax than what he/she actually owes for that financial year. This is an income tax refund and can be claimed under Section 237 of the Income Tax Act 1961. 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 0.5% per month or part of the month (i.e. 6% per annum) is paid till the date of refund. No refund is payable if the Refund is less than 10% of the tax payable; similarly, if the refund amount is less than Rs 100, there will be no refund. 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.