ITR Deadline Extension 2025: How Much More Tax Refund Interest Can You Get?

The Central Board of Direct Taxes has extended the deadline for filing Income Tax Return (ITR) from 31 July 2025, to 15 September 2025, for the Assessment Year 2025-26. Though the extension may provide respite to taxpayers, it may increase the interest burden on the tax refunds to the government. 

What is Tax Refund?

When the amount of tax the taxpayer pays in any financial year exceeds the amount he is liable to pay in that year, the excess amount qualifies for a tax refund. Simply put, if the tax paid by the taxpayer during the financial year in the form of TDS, TCS, or by way of advance tax exceeds the total tax liability for that year, the taxpayer will receive the excess amount as a tax refund from the Income Tax department. 

The tax refund that the taxpayer will receive is out of any tax payments made by the taxpayer in the form of TDS, TCS and advance tax during the financial year. The refund amount is chargeable to interest at the rate of 0.5% for each month or part of a month for a the period from 1 April 2025 to the date of grant of the refund by the Income Tax department is considered for the calculation of interest on the refund amount if the ITR is filed by the taxpayer on or before the deadline as specified under sub-section (1) of section 139.

However, if the taxpayer does not file the ITR within the due date, the interest is calculated for the period from the date when the taxpayer files the ITR to the date when the Income Tax department grants the refund. 

How is Interest Calculated?

According to Rule 119A of the Income Tax Act, 1961, the following procedure has to be followed while calculating interest on tax refund.

• While calculating interest on an annual basis, you have to count the whole year and the number of whole months. Any fraction of a month is ignored.

For example, if you want to calculate the interest for 1 year and 16 days. The interest will be calculated for 1 year only.

• While calculating interest monthly, every fraction of a month will be considered a whole month.

For example, if you want to calculate interest for 6 months and 16 days, the interest will be calculated for 7 months.       

• When calculating the total tax refund, it must be rounded off to the nearest hundred. Any fraction of one hundred must be ignored.

For example, if the tax refund is Rs 10,990, the refund amount to be considered will be Rs 10,900. 

Now, let’s understand with an example how we can calculate the interest on a Tax Refund. 

Let’s assume that Mr X is a taxpayer who claims a tax refund of Rs. 76,900 to the Income Tax department for the AY 2025-26. The deadline for filing the Income Tax Return is 15 September 2025. He files the ITR on 1 August 2025 and receives a tax refund on 8 August 2025. Now, we will see how we can calculate the interest on the tax refund. 

As Mr X filed the ITR before the deadline, the interest calculation period will be from 1 April 2024 to 8 August 2025, which is 5 months. The rate of interest is 0.5% per month. The tax refund amount is Rs 76,900.

How Taxpayers May Get More Interest in 2025?

As discussed earlier, interest calculation on the tax refund is done from 1 April 2025 to the date of payment of the tax refund to the taxpayer by the Income Tax department if the ITR is filed within the deadline of ITR filing. However, the recent Circular No. 6 of 2025 announced the extended date of ITR filing for the assessment year 2025-26 from 31 July 2025 to 15 September 2025. The implication of extending the deadline falls upon the government by way of an increase in interest liability on tax refunds. Let’s take an example and understand how much of an increase in interest liability the government has to bear by extending the deadline for ITR filing for the assessment year 2025-26. 

Let’s calculate the interest amount on the tax refunds under two scenarios.

Scenario 1 assumes that the taxpayer has filed the ITR on 15 July 2025 and e-verified it. Also, it is assumed that the tax refund is out of the TDS deducted from the taxpayer's income, and the Centralised Processing Centre (CPC) processed the return on 31 July 2025. The period for interest calculation is 4 months, and the interest rate is 0.5% per month.

Scenario 2 assumes that the taxpayer filed the ITR on 15 September 2025 and e-verified it. Also, it is assumed that the tax refund is out of the TDS deducted from the taxpayer's income, and the Centralised Processing Centre (CPC) processed the return on 30 September 2025. The period for interest calculation is 6 months, and the interest rate is 0.5% per month.

Let’s calculate the interest on the refund amount for five taxpayers whose tax refund amount is shown in the table below. (All the assumptions mentioned in Scenarios 1 and 2 remain the same for all the taxpayers)

From the above table, we can conclude that extending the ITR filing deadline increases the period for which interest is calculated on the tax refund. As a result of the increase in the period, the interest amount increases.

Taxability of Additional Refund Interest

Section 244A of the Income Tax Act discusses the interest paid to the taxpayer on the tax refund made by the Income Tax Department. The amount of interest received on a tax refund is chargeable to tax as ‘Income from other sources’, subject to the applicable income tax slab rates. 

Who Pays the Interest on Tax Refund?

Not every taxpayer will receive interest on the tax refund. The Income Tax department pays the interest on a tax refund to the taxpayer if the tax deducted during the financial year by way of TDS, TCS or advance payment is more than the total tax liability calculated for the same year by 10%. 

Final Words

The extension of the ITR filing deadline can increase the interest income on tax refunds for the taxpayers. It will also increase the interest liability on tax refunds for the government for the assessment year 2025-26. However, taxpayers should file their ITR within the deadline to avail of the benefit of increased interest.