Interest on Tax Refund refers to the additional amount paid by the Income Tax Department to taxpayers when a refund is issued late. Under Indian tax laws, if the Income Tax Department delays issuing a refund beyond a certain period, the taxpayer is entitled to receive interest on the refundable amount. This interest is typically calculated at a fixed rate (currently 0.5% per month or 6% per annum) from the end of the assessment year until the date the refund is granted.
This concept is particularly relevant for individuals, professionals, and small business owners who have paid excess tax in the form of advance tax, self-assessment tax, or TDS (Tax Deducted at Source). When their actual tax liability turns out to be lower after filing the Income Tax Return (ITR), the excess amount becomes refundable. If this refund is not processed within the prescribed time, the department compensates by adding interest.
Interest on Tax Refund is considered taxable income and must be disclosed under “Income from Other Sources” while filing your next ITR. Failing to report it may lead to notices or reassessment.
Understanding this term helps businesses and individual taxpayers stay informed about their entitlements and ensures better tax compliance. It also encourages timely and accurate filing of returns, as eligible refunds (with interest, if delayed) can support cash flow.
To know more about managing your income tax filings and refunds, visit FinTax24’s Income Tax Solutions.