Income tax refund! Sounds quite familiar, doesn’t it? Many of us would have received a refund from the income tax department in the past. So, when and how does one get a refund?

Refund arises when taxes paid are higher than your actual tax liability (including interest). It could be in the form of advance tax, self-assessment tax, tax deducted at source, foreign tax credit etc.

  1. When is interest levied u/s 234D of Income Tax Act?

The refund would be granted under an intimation issued under Section 143(1) of the Income Tax Act. Subsequently, the taxpayer may be subject to scrutiny at a later date. Upon such scrutiny, and upon a regular assessment, the refund amount may be reduced or no refund may be due. Hence, the earlier amount refunded would be recoverable from the taxpayer. Section 234D further levies interest on the amount recoverable from the taxpayer.

  1. What is the rate of interest and period of imposing interest?

The rate of interest under Section 234D is levied at 0.5% per month or a part of the month on the refund amount recoverable from the taxpayer.

The interest is calculated from the date of granting the refund under Section 143(1) until the date of regular assessment.

  1. How is interest computed?

As per Rule 119A, the computation details of the interest payable by the assessee or the Central Government is given below:

  • Interest calculated on a monthly basis:

When interest is calculated on monthly basis, fraction of the month will be considered as full month.

  • Interest calculated on an annual basis:

Interest will be calculated for a period based on the rounded-off months.

  • Interest amount rounded off to one hundred:

The amount of interest calculated on the excess refund will be rounded off to the nearest multiple of one hundred. Any fraction of Rs 100 is ignored and the rounded off amount will be considered payable as an interest to the department.

  1. Illustration

Consider that Mr. X has received an excess refund of Rs 7,660 upon intimation under Section 143(1). He has kept the excess money with him for 7 months and 19 days before paying it to the IT department.

Under Section 119A, the interest for this can be calculated as given below:

  1. 7 months and 19 days will be rounded off to 8 full months.
  1. While computing the refund liable for interest under Section 234D, any fraction of 100 shall be ignored. Thus, Rs 60 will be ignored and the balance amount will come to Rs 7,600. The interest will be calculated on Rs 7,600.
  1. The interest is calculated at the rate of 0.5% per month; 0.005 * Rs 7,600 * 8 = Rs 304.
  1. An interest amount that is not a multiple of Rs 100 will be rounded off to the nearest multiple of Rs 100. In this case, the nearest multiple is Rs 300.

Mr A must pay Rs 300 as the interest for the excess refund. That is, a total amount of Rs 7,900 must be paid back to the IT department under Section 234D of the Act.