Interest on Excess Income Tax Refund

Section 234D of Income Tax (I-T) Act

Sometimes, it may happen that a taxpayer is given an excess tax refund after he has filed for his Income Tax Return (ITR). The refund is given after a notification is issued under Section 143(1) of the I-T Act.

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Based on this refund, the I-T department can carry a regular assessment. It may reduce, or direct that no refund is due based on its findings. In this case, the amount given to the taxpayer will be taken back and an interest will be levied on the amount recovered. Section 234D of the IT Act provides assessment of interest on the extra refund given to the taxpayer.

Section 234D of Income Tax Act: Interest rate on excess I-T refund

Under Section 234D, interest rate of 0.5% per month is levied on the refund recovered from a taxpayer. The interest is calculated from the date of granting the refund under Section 143(1) till the date of regular assessment.

Interest on excess Income Tax refund: How is it calculated?

Interest on excess Income Tax Refund is calculated as per the Rule 119A. Here are some details mentioned as per the I-T department tutorial.

Interest on Excess Income Tax Refund calculated on an annual basis: This interest has to be calculated on an annual basis, the period for which shall be rounded off to a whole month or months. Any fraction of a month shall be ignored, and the period will be rounded off to be the period with respect to which the interest is to be calculated.
Interest on Excess Income Tax Refund calculated on per month basis: This interest has to be calculated for every month, or part of a month, that is part of the period. Any fraction of a month shall be rounded to be a full month and the interest on excess ITR shall be calculated accordingly.
Rounded off to the nearest multiple of Rs 100: Amount of tax, penalty, or other sum, according to which such interest is calculated should be rounded off to the nearest multiple of Rs 100. Any fraction of Rs 100 shall be ignored and the amount will be rounded off based on which interest will be calculated.

Illustrated below with an example:

You have to compute interest under Section 234D on Rs 7,459 for four months and 11 days, then according to rule 119A as discussed above, first ignore any fraction of Rs 100. Hence, Rs 59 from the amount will be ignored.

Now, the amount to be considered will be Rs 7,400. Next, 11 days will be rounded off as a full month. So, interest will be calculated for four months instead of four months and 11 days.

Interest on Excess Income Tax: Adjustment under Section 234D

As a result of an order under Section 154, Section 155, Section 250, Section 254, Section 260, Section 262, Section 263, Section 264, or an order of the Settlement Commission under Section 245D (4), the amount of refund granted under sub-section of Section 143(1) has to be correctly allowed, either in whole, or in part, depending on the case. Then, if any interest has been charged under Section 234D (1), it shall be reduced accordingly.