Most of us who file our income tax returns on time would tend to receive a refund on account of TDS that is deducted from time to time. The question that often arises is: does the Income Come Tax Department pay interest on the amount of income tax refund?
How is interest on income tax refund calculated?
Let's first assume that you have filed your income tax returns before the due date. In that case if you have a refund you would be entitled to an interest rate of 6 per cent per annum, which would be added to your tax refund.
It translates to 0.5 per cent per month. Interestingly, the interest is paid from the start of the financial year. Now, let's take an example on how it works.
Let's say you have a tax refund for Rs 50,000. Your income tax officer has send the refund to you on Oct 5, 2015. In this case you would be paid an interest of 0.5 per cent per month beginning from April 1, 2015 until Oct 31, 2015.
Interestingly, a partial month is considered as a whole month for the purpose of interest payment. For example, the interest in the above case would not be paid until Oct 5, but, until Oct 31, 2015.
Is the interest on the refund amount taxable?
Definitely, the interest income on the refund is very much taxable. While you may not pay tax on the refund amount, you have to pay tax on the interest of the refund amount. So, in the subsequent financial year, you need to add this interest while computing your tax liability.
These days the income tax department is very quick in processing tax refunds due to the fact that technology has made things very fast. For example, the delay due to non receipt of ITR has been eliminated by linking the same to the Aadhar Card. On the other hand e-filing has made tax refunds faster and smoother.
Hence the outgo by the government on interest paid on tax refunds has been reduced dramatically. These days it is possible to receive a refund even within a week to fortnight if you have linked your Aadhar card at the Incomer Tax Department.
It's extremely important to file your income tax refund within the due date if you wish to receive your refund on time.
Also read reasons why your income tax returns can be returned