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Taxpayers often end up paying more taxes than they are actually required to pay. The taxpayer is eligible to claim the excess tax paid as a refund. This excess tax can be in the form of self-assessment tax, advance tax, and Tax deducted at source. The taxpayer is also eligible to receive interest on income tax for the period of delay in receiving the refund. This guide explains all that you need to know about income tax refunds and interest on income tax refunds.
An income tax refund is a financial transaction in which the Income Tax Department returns the excess income tax paid by the taxpayer. Many times, an individual or entity ends up paying more income tax during a financial year than they are obligated to pay based on their annual income after considering all the deductions and exemptions. This can be in the form of TDS deducted by employers, advance tax, and self-assessment tax.
At the end of the year, the income tax department calculates the taxpayer’s total tax liability on the basis of the reported income and the eligible deductions and exemptions. If the tax liability calculated by the income tax department is less than that paid by the taxpayer, the excess amount becomes due and has to be refunded by the income tax department to the taxpayer.
The government of India engages in various welfare schemes and activities throughout the year. For this, it needs funds throughout the year. Taxes being the major source of funds for the government, it becomes important to collect taxes at regular intervals throughout the year.
Due to this, the taxpayers pay tax on the basis of estimated income and investments in the form of self-assessment tax, advance tax, etc. At the same time, the actual income and investments are different. All this can lead to either excess tax payment or less tax payment. If the taxpayer has paid more tax than is actually obligated, a tax refund becomes due and vice versa.
The date of tax filing and the date of the refund is different. In other words, there is a time gap between tax filing and the receipt of a refund. The taxpayer has to wait for some days before receiving their income tax refund. The income tax department provides interest on the refund amount to the taxpayer for the delay in refund.
An interest of 0.5% per month is paid from April 1 till the date on which the refund is granted. However, such interest is not payable when the tax refund is less than 10% of the total tax liability.
For Example, Mr. A has a total tax liability of 20,000. He has paid 24000 as tax. The excess 4000 is claimed as a refund. Since 4000 is in excess of 10% of the total tax liability, interest at @0.5% is payable on this amount. The interest will be calculated from April 1 till the date of the receipt of the refund.
Now that you know what an income tax refund is and when is interest on a refund paid, the next question is how it is taxed.
Here’s how the taxability of an income tax refund and its interest are determined.
Since the entire process of filing and processing income tax returns is time-consuming, the taxpayer is paid interest on the income tax refund amount. The interest on income tax refund should be reported under the head ‘income from other sources.’ This interest must be included in the income tax return in the financial year in which the refund is received. If any TDS is deducted from the interest on income tax, a refund has to be claimed against the total tax liability.
If you have filed your ITR and received an income tax refund along with the applicable interest, make sure you report it in the ITR under the head ‘income from other sources.’ This interest is considered as income and chargeable to tax. If you have not filed your ITR yet or forgot to mention interest on tax refund, then you can file a belated or revised return with Tax2win in less than 4 minutes. If you are having trouble filing your ITR or waiting to receive your income tax refund, you can book an eCA from Tax2win to avoid any hassle.
Interest income is considered an exempt service and is not considered a supply as it is not received against any consideration. Therefore, as per the GST Act, interest on income tax refund is not considered taxable income.
When the taxpayer is eligible to get a refund for paying extra taxes in the form of advance tax, self-assessment tax, and TDS, the interest on such an amount is calculated at @0.5% per month or part of a month thereof till the time the refund is credited to the taxpayer’s bank account.
Interest on the income tax refund is paid by the Income Tax Department of India under section 244 A of the Income Tax Act. The interest is paid @0.5% per month or 6% per annum.
Interest on an income tax refund is not applicable if the tax refund amount is less than 10% of the total tax liability. Similarly, if the refund amount is less than Rs.100, there will be no refund. In other words, the refund amount should be more than Rs.100 for the Income tax department to initiate the refund.
