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Interest on Income Tax Refund – Taxable or Not

Updated on:  

08 min read

This article will help you understand Taxability of Interest on Income Tax Refund. When a taxpayer has paid an excessive tax than what he is liable to pay, the assessee is eligible to claim 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.

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Interest at 0.5% per month (i.e 6% per annum) is paid from 1st April till date of refund. No refund is payable if the Refund is less than 10% of tax payable. 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).

Taxability of Interest on 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      

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