Interest on Refund

Introduction: 

Interest on Refund is paid when the taxpayer overpays their tax or any other amount which he is not required to be paid under the provisions of the law. It was introduced to encourage the taxpayer to pay their tax on time and to discourage the department from doing their sluggish work of repayment of overpaid tax. Section 244A of the Income Tax Act, 1961 deals with the specific provision for Interest on Refund. In this article, we will discuss the provisions relating to Interest on Refund under the Income Tax Act, 1961. 

What is Section 244A of the Income Tax Act, 1961? 

Section 244A of the Income Tax Act, 1961 provides for interest on refund on any amount due to the assessee. It provides that the assessee shall be eligible for interest on refunds if he fulfills certain conditions. It encourages the taxpayer to pay tax on time and discourages the department in their sluggish work relating to refund of income tax.  

How is interest on refund calculated under Section 244A? 

Refund related to Advance Tax, TDS/ TCS:

If the refund is due to the following conditions – 

1. If the refund is due to excess payment of advance tax 
2. If the refund is due to excess collection of tax at source (TCS) under Section 206C 
3. If the refund is due to excess deduction of tax at source (TDS) under Section 199 

Then he is eligible for interest on such refund at the rate of 0.5% per month or part of a month i.e., effective rate of interest of 6% per annum.  

The interest on refund for fulfillment of above conditions is to be calculated – 

1.  If the return of income has been furnished before the due date mentioned under Section 139(1)– from 1st April to the date of grant of refund 
2. If the return of income has not been furnished before the due date mentioned under Section 139(1) – From the date on which return is furnished to the date of grant of refund. 

Refund for Excess Payment of Self-Assessment:

If the refund is due to any excess payment of self-assessment tax under Section 140A, then the rate of interest shall be 0.5% per month or part of a month i.e., effective rate of interest of 6% per annum from-

• The date of furnishing of return of income, or 

• The date of payment of tax, 

Whichever is later to the date of grant of refund. 

Refund in any other case:

In any other case except the above two, interest on refund shall be at the rate of 0.5% per month or part of a month i.e., effective rate of interest of 6% per annum from the –

• Date of payment of tax, or 

• Date of payment of penalty 

To the date of grant of refund. 

Additional Interest on the amount of Refund:

If the refund arises due to giving effect of an order under – 

1. Section 250i.e., Order of Commissioner of Income Tax (Appeal) 
2. Section 254 i.e., Order of Income Tax Appellate Tribunal 
3. Section 260 i.e., Order of a High Court 
4. Section 262 i.e., Order of the Supreme Court  
5. Section 263 i.e., Revision of orders prejudicial to revenue by Commissioner of Income Tax 
6. Section 264 i.e., Revision of other orders by Commissioner of Income Tax 

then the assessee shall be entitled to receive an additional interest of 3% per annum from the date following the date of expiry of the time allowed under section 153(5) to the date of grant of refund.  

Thus, additional interest shall be paid only when there is a delay beyond the time allowed under Section 153(5). Also, if any extension is granted by the Principal Commissioner or Commissioner of Income Tax by invoking the proviso of Section 153(5) then additional interest shall be paid only if there is any delay of refund beyond the date of extension. 

Refund related to amount paid to credit of Central Government:

• If the refund is due to any amount which is due to the deductor for any amount paid to the credit of the Central Government under Chapter XVII-B, then the deductor shall be entitled to receive interest on refund at the rate of 0.5% per month or part of a month i.e., effective rate of interest of 6% per annum from–
• The date on which claim for refund is made, or 
• The date on which tax is paid, if the refund is due to giving effect of the order under section 250 or section 254 or section 260 or section 262. 

To the date on which refund is made. 

Exceptions under Section 244A: 

There will be no interest on refund if – 

1. In case of the circumstances (A) and (B) mentioned above, if the refund amount is less than 10% of the tax as determined under section 143(1) or on regular assessment. 

1. If the delay in refund is attributable to the assessee or deductor, then no interest shall be paid for delay. The period of delay to be excluded shall be decided by the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner.  

Application for Interest on Refund: 

The refund of Income tax can be claimed by filing the correct Income Tax Form before the due date by checking the Form 26AS. However, one can also file Form 30 for claiming refund of Income Tax. 

Do you need help with filing of the form? Contact us today.

Implications for taxpayers for Interest on Refund 

Taxpayers who have paid more tax than their actual tax liability or who are experiencing a delay in possessing of refund will get benefit of this section. As this section provides for Interest on refund, the taxpayers will not miss the interest of their overpaid tax. This section will discourage the department in doing sluggish work regarding refund of income tax. However, the interest rate of 6% p.a. that is paid for interest on refund is not sufficient from the taxpayer point of view as this will not cover his opportunity cost.  

Conclusion: 

Interest on Refund is an important provision that allows for interest on refund to taxpayer for their overpayment of tax or any other amount which he is not required under the law to pay. However, there are certain exceptions where a taxpayer is not entitled to any interest on refund. Further, there is also a provision for additional interest in certain cases. It is important to understand from which date the interest will be payable. It encourages the taxpayer to pay their taxes on time and for quick processing of refund by the Department.