Is Interest on Income Tax Refund Taxable?

What is an Income Tax Refund?

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.

When is Interest on Income Tax Refund Payable?

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 may have to wait for a couple of weeks 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 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.

Period of Interest

• If you file your return on or before the due date under section 139(1), interest accrues from April 1 of the assessment year until the refund is granted.
• If you file your return after the due date under section 139(1), interest accrues from the date you file your return until the refund is granted.

Taxability of Income Tax Refund

An income tax refund is not considered as income and does not attract any tax liability. It is already considered while filing the ITR. Therefore, it is not regarded as income and is not taxable

Taxability of Interest on Income Tax Refund

Now that you know what an income tax refund is and when interest on a refund is paid, the next question is how it is taxed.

• Taxability of Interest on Income Tax Refund
  Interest on an income tax refund is paid by the Income Tax Department to the taxpayer. Such interest on the refund amount is considered income and attracts tax under the head ‘income from other sources’. Therefore, it is important to report the interest income while filing the ITR.

How to Report the Interest on Income Tax Refund in ITR

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 e-filing 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 an ITR or a revised return now in less than 4 minutes. If you are having trouble filing your with ITR filing or waiting to receive your income tax refund, you can book an eCA from Tax2win to avoid any hassle.

The last date to file ITR is 31st July. So, file your ITR now and claim your tax refund.