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If there is a miscalculation while paying income tax, you can claim a refund of the excess amount. The IT department will process your income tax refund at the time of processing your income tax return. However, there are chances that the income tax department may pay the refund in excess. But, how is this excess refund considered in terms of income tax? How do you handle the situation? There are many aspects of it you need to know.

  1. When is interest levied under section 234D?
  2. What is regular assessment?
  3. What is the rate of interest and period of imposing it u/s 234D?
  4. What are the possible adjustments?
  5. How is interest computed under Section 119A?
  6. Illustration

1. When is interest levied under section 234D?

There may be cases where a taxpayer has been granted a refund upon processing of an income tax return. The refund would be granted under an intimation issued under Section 143(1) of the Income Tax Act. Subsequently, the taxpayer may be subject to scrutiny at a later date. Upon such scrutiny, and upon a regular assessment, the refund amount may be reduced or no refund may be due. Hence, the earlier amount refunded would be recoverable from the taxpayer. Section 234D further levies interest on the amount recoverable from the taxpayer.

2. What is regular assessment?

Regular assessment is an assessment carried out under Section 143(3) under a scrutiny notice issued to the taxpayer. This also includes the best judgement assessment under Section 144. Any assessments made for the first time under Section 147 or 153A will also be treated as regular assessment.

3. What is the rate of interest and period of imposing it u/s 234D?

The rate of interest under Section 234D is levied at 0.5% per month or a part of the month on the refund amount recoverable from the taxpayer. The interest is calculated from the date of granting the refund under Section 143(1) until the date of regular assessment.

4. What are the possible adjustments?

If under an order passed under any of the sections mentioned below, the refund granted under Section 143(1) is held to be correctly allowed, then the interest levied under Section 234D would be adjusted as per the orders:

Section

Description

Section 154

Rectification of mistake

Section 155

Other amendments

Section 250

Order of Commissioner (Appeals)

Section 254

Orders of Appellate Tribunal

Section 260

Judgement of the high court or the Supreme Court 

Section 262

Hearing before the Supreme Court

Section 263

Revision of orders prejudicial to revenue by the Commissioner

Section 264

Revision of other orders by Commissioner

5. How is interest computed under Rule 119A?

According to Rule 119A, the computation details of the interest payable by the assessee or the Central Government is given below:

  • Interest calculated on a monthly basis:

  • When you calculate interest for a part of the month comprised in a period or a fraction of the month, you are required to calculate the interest considering a full month.

  • Interest calculated on an annual basis:

  • As stated earlier, the period for which interest must be calculated will be rounded off to full months. Interest will be calculated for a period based on the rounded-off months.

  • Interest amount rounded off to one hundred:

  • The amount of interest calculated on the excess refund will be rounded off to the nearest multiple of one hundred. Any fraction of Rs 100 is ignored and the rounded off amount will be considered payable as an interest to the department.

    6. Illustration

    Consider that Mr A has received an excess refund of Rs 5,660 upon intimation under Section 143(1). While computing the refund liable for interest under Section 234D, any fraction of 100 shall be ignored. Thus, Rs 60 will be ignored and the balance amount will come to Rs 5,600. The interest will be calculated on Rs 5,600. He has kept the excess money with him for 5 months and 17 days before paying it to the IT department. Under Section 119A, the interest for this can be calculated as given below:

  • 5 months and 17 days will be rounded off to 6 full months

  • The interest is calculated at the rate of 0.5% per month; 0.005 * Rs 5,600 * 6 = Rs 168

  • An interest amount that is not a multiple of Rs 100 will be rounded off to the nearest multiple of Rs 100. In this case, the nearest multiple is Rs 200

  • Mr A must pay Rs 200 as the interest for the excess refund. That is, a total amount of Rs 5,800 must be paid back to the IT department under Section 234D of the Act.