The Tax Implications of Interest on Income Tax Refund

• If you have paid more tax than the calculated tax liability, you become eligible for an income tax refund.
• The income tax department also pays interest on income tax refunds.
• The interest on income tax refund is paid at 0.5% per month till the refund is credited to your bank account.
• The interest on income tax refund is taxed at your income tax slab rates.

As a taxpayer, you pay tax on the aggregate income earned in a financial year. In many cases, a TDS (tax deducted at source) is deducted from your income before it is credited.Due to the TDS already paid, there might be times when you end up paying excess tax than the actual tax liability. This makes you eligible for an income tax refund.The income tax department also pays interest on income tax refunds for any delay in repaying the tax refund. Find out whether or not interest on income tax refunds is taxable.

In some cases, you might have paid a higher amount of tax in the form of advance tax or TDS than the actual tax amount.This excess tax amount is transferred back to you by the income tax department. This is called an income tax refund.

After filing your returns, there is a gap after which you get your refund from the income tax department. The income tax department has to pay interest on the ITR refund during the gap period.The rate of interest on income tax refund is 0.5% per month on the refundable tax amount.However, the interest on ITR refund is not paid on the refund amount in the following cases:

• If the tax refund amount is less than 10% of the total tax amount
• If the tax refund amount is less than ₹100

The interest period is calculated according to Section 139(1) in two different scenarios, which are as follows:

• If the return is filed on/before the due date, the interest rate will be charged from the start of the financial year (1stof April) till the refund date.
• If the return is filed after the due date, then the interest rate will be charged from the date of filing of the return till the date of the refund.

The interest period calculation is essential to understand the taxation rule for interest on tax refund.

No tax is charged on the refundable tax amount, as it was already taken into consideration while filling the ITR for the financial year.The interest on income tax refund received is considered income in your hands. As such, the interest on income tax refund is taxable at your tax slab rate. So, if you fall into the 30% tax slab, you pay a tax of 30% on the interest on income tax refund.

When filing your Income Tax Return (ITR), the interest earned on the refunded amount will be mentioned under the head ‘income from other sources’.This amount is to be included in the financial year in which it is received. If TDS is deducted from the interest amount, you can claim the refund against the total tax liability.

Is income tax refund taxable? No, it is not. But the interest that you earn on it might be. So, it is important to understand the ITR interest rate and its tax liability.Calculate the interest on the IT refund to know the additional income you can get
Know how to check interest on income tax refund to know the additional income you can get. Also, pay the appropriate tax on the interest on tax refund to file your taxes correctly . Also Read: What to do if the Income Tax Refund is Delayed?