Section 244A: Know about Interest on Income Tax Refund

What is the Interest on income tax refund? You might have surely Googled it if your ITR refund is pending for FY 2023-24. Interest on refund of income tax returns applies when your refund of excess tax is pending after your Income Tax Return (ITR) is filed.

You might have paid excess tax in the form of Tax Deducted at Source (TDS), Advance Tax (AT), or Self Assessment Tax (SAT). If you (the taxpayer) have paid excess income tax under any of these, you can be eligible for a refund. You will be paid an interest for the period you wait to receive the refund amount. This is called interest on income tax refund. 

Here are broad details about an income tax refund, the interest rate on income tax refund, and applicable tax.

What is an income tax refund?

As per the income earned during a financial year, every person has a unique income tax liability. However, a taxpayer ends up paying taxes over and above their liability while paying taxes like TDS, AT, or SAT. Therefore, barring their tax liability for their income earned during a financial year, all the additional tax amount paid is eligible to be refunded. 

To get this refund, taxpayers need to file their Income Tax Returns (ITR). And once the ITR is e-verified, the refund for the same is processed. The income tax refund received is exempted from tax liability. This is because this amount was already considered during the previous year’s tax calculation. 

What is the interest rate on income tax refunds?

Now that the ITR is filed, it would take some time for the income tax refund amount to be processed. The Income Tax Department (ITD) pays the taxpayer interest for this period, which is known as interest on income tax refund. 

As per Section 244A of the Income Tax Act, the ITD would pay a simple interest of 6 per cent per annum on the refund amount to the assessee. Therefore, this comes to a monthly simple interest of 0.5 per cent. 

Interest on an income tax refund is taxable under which head?

So, is interest on income tax refund exempt under the section? Or is interest on income tax refund taxable? Yes, interest on an income tax refund is taxable.

Interest on income tax refund would be considered as ‘income from other sources’ while calculating income tax returns for the current financial year (the year in which income tax refund was received). In case a TDS is deducted against 244A interest, it can be claimed against the assessee’s total tax liability. 

Interest on income tax refund example

Here is a hypothetical example explaining interest on income tax refund. 

Suppose Mrs Malati has an income tax liability of ₹50,000 for FY 2023-24. She has filed an ITR for the same in Assessment Year 2024. Total taxes paid by her were in the form of TDS that was deducted by her employer, which was ₹1,00,000 for the financial year. 

Now, Malati is eligible to receive a refund of ₹1,00,000 minus ₹50,000, which is equal to ₹50,000 as a refund. Malati has claimed this amount while filing her income tax returns. 

Therefore, Malati would receive a refund of ₹50,000 along with interest. 

If Malati receives her income tax refund in October, the period from April to October (7 months) will be calculated for interest. So, in October, Malati would receive interest along with her income tax refund, which would be ₹51,750. 

Conclusion 

Interest on income tax refund can be calculated using the interest on income tax refund calculator 244A, available online. As per section 244A of the Income Tax Act, interest is applicable on the income tax refund amount to be paid to the assessee. But unlike the income tax refund amount, the interest on the income tax refund is taxable. It should be taken care of while filing tax returns. 

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