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Direct Tax Laws & International Taxation · Deduction, Collection and Recovery of Tax

Recovery of Tax and Refunds: CA Final Direct Tax

Updated 5 October 2026 · Fact-checked

Recovery of tax is how the department collects an unpaid tax demand, using modes such as deduction from money owed to the assessee, attachment and sale of property through the Tax Recovery Officer, and adjustment against refunds. A refund is excess tax returned, with simple interest at 0.5% per month or part of a month.

Understand Recovery of Tax and Refunds

When the Assessing Officer finalises tax, he serves a notice of demand. You must pay within the time stated in the notice, which is 30 days from service. If you do not pay, you become an assessee in default. You then owe simple interest at 1% per month or part of a month on the unpaid amount, and the department can start recovery. This page follows the Income-tax Act, 2025 for tax year 2026-27.

Recovery has two tracks. The Assessing Officer can recover directly in two ways. He can adjust the arrear against a refund due to you. He can also require a person who owes you money (a bank, a debtor, an employer) to pay it to the department. This is called a garnishee recovery. The second track is the Tax Recovery Officer (TRO). The Assessing Officer sends a recovery certificate to the TRO, who then proceeds under the recovery procedure in the Schedule to the Act. Attachment and sale of your movable and immovable property go through this TRO procedure.

The TRO's modes are: attachment and sale of your immovable property, attachment and sale of movable property, arrest and detention of the defaulter, and appointment of a receiver to manage property. Attachment comes first, then a proclamation of sale, then the sale itself. For immovable property, the sale is not held before 30 days from the proclamation. For movable property, the gap is 15 days. The idea is to give you a last chance to pay.

You are not helpless. The Assessing Officer or appellate authority can grant a stay of demand or allow payment in instalments when you have filed an appeal or show genuine hardship. Where a demand is reduced in appeal, the recovery shrinks with it.

Refund is the mirror image. If tax paid (TDS, TCS, advance tax, self-assessment tax) exceeds tax due, the excess is refunded. The department pays simple interest at 0.5% per month or part of a month for the period it held your money. Interest is the compensation for delay.

The period depends on the type of payment. For a refund of TDS, TCS or advance tax, it runs from 1 April following the tax year (or the filing date if the return is late) to the date of grant. For a refund of self-assessment tax, it runs from the date of payment of the tax to the date the refund is granted. The 10% rule belongs to the TDS, TCS and advance tax provision: no interest is given on such a refund if it is less than 10% of the tax determined on regular assessment.

Key rules to remember

Interest on default in paying demand
Interest = Unpaid demand × 1% × number of months or part months
Simple interest. Runs from the day after the 30-day period in the notice ends, until payment. Part of a month counts as a full month.
Time to pay demand
Payment due within 30 days of service of the notice of demand
Failure makes the person an assessee in default. Stay or instalments can be granted by the authority on application.
Interest on refund of TDS, TCS or advance tax
Interest = Refund × 0.5% × number of months or part months
Period runs from 1 April following the tax year to the date the refund is granted. If the return is filed late, the period starts from the date of filing.
Interest on other refunds (e.g. self-assessment tax)
Interest = Refund × 0.5% × months or part months from date of payment of the tax to date of grant of the refund
Applies to tax paid other than TDS, TCS and advance tax. The 10% threshold is a condition of the TDS, TCS and advance tax provision, not of this one.
10% threshold for refund interest
No refund interest if refund < 10% of tax determined on regular assessment
Applies only to the refund of TDS, TCS and advance tax. Check this before computing.
Recovery procedure sequence
Recovery certificate → attachment → proclamation → sale (not before 30 days from proclamation for immovable property; 15 days for movable property)
TRO modes: immovable and movable property, arrest and detention, receiver. The Assessing Officer's own direct modes are adjustment against refund and garnishee.

How to solve Recovery of Tax and Refunds questions

Use this order for any recovery or refund question. It keeps your answer in provision-facts-conclusion form.

  1. 1Identify whether the question is about recovery (arrears) or refund. Some questions use both, where a refund is adjusted against a demand.
  2. 2For recovery, find the date of service of the notice of demand and add 30 days. That is the last date for payment without default.
  3. 3If payment is late, compute 1% simple interest per month or part of a month from the day after that last date up to the date of actual payment.
  4. 4Name the correct mode of recovery for the facts: adjustment against refund or garnishee on a debtor or bank (by the Assessing Officer), or a certificate to the TRO for attachment and sale of movable or immovable property, arrest or receiver.
  5. 5For a TRO question, follow the sequence: certificate, attachment, proclamation, sale not earlier than 30 days after proclamation for immovable property (15 days for movable property). Mention stay or instalment relief if the facts show an appeal or hardship.
  6. 6For refund, compute refund = tax paid less tax due, then check the 10% test against tax determined on regular assessment.
  7. 7Fix the interest start date (1 April following the tax year for TDS, TCS and advance tax, or the filing date if the return is late; date of payment for other refunds) and the end date (date of grant). Count every part month as a full month, then apply 0.5%.
  8. 8State the conclusion in one line with the amount, and mention any adjustment of refund against outstanding demand.

Quickest way: Month-count shortcut for interest

When to use it: Use it when a numerical asks for interest on a late demand payment or on a refund and the dates are given.

  1. Write the start date and end date on the margin.
  2. Count calendar months touched, including the first and last. A part month counts as one.
  3. Multiply the principal by the rate (1% for default, 0.5% for refund) and by the month count.
  4. For refunds, first check the 10% test. If the refund is below 10% of tax determined, interest is nil. Stop there.
  5. Round only at the end and show the formula in your answer so partial marks are safe.

Common mistakes in Recovery of Tax and Refunds

  • Charging default interest from the date of the notice instead of after the 30-day period.

    Students forget that the notice itself gives 30 days to pay.

    Fix: Add 30 days to the service date first. Interest starts on the next day.

  • Counting part of a month as a fraction of a month.

    It feels natural to prorate by days.

    Fix: Both the 1% and the 0.5% rates apply per month or part of a month. Count any part as a full month.

  • Mixing up the two rates: 1% for default, 0.5% for refund.

    Both are monthly simple interest and look alike.

    Fix: Remember that the department charges you more (1%) than it pays you (0.5%).

  • Giving refund interest without checking the 10% threshold.

    Students jump to the multiplication.

    Fix: For TDS, TCS and advance tax refunds, compare the refund with 10% of tax determined on regular assessment first.

  • Starting refund interest from the date the tax was deducted or paid, for TDS and advance tax.

    Students apply the rule for self-assessment tax to all refunds.

    Fix: For TDS, TCS and advance tax, the period starts on 1 April following the tax year, or the filing date if the return is late. Only other payments count from the payment date.

  • Saying the TRO can sell property immediately after attachment.

    Students skip the proclamation stage.

    Fix: Write the sequence: certificate, attachment, proclamation, then sale. The sale is not held before 30 days from the proclamation for immovable property, or 15 days for movable property.

Worked examples

Example 1

Under the Income-tax Act, 2025 (tax year 2026-27), a notice of demand for ₹5,00,000 was served on Mr. Rao on 1 June 2026. He paid the full amount on 20 September 2026. He had not applied for a stay. Compute the interest for default and state the consequence of non-payment within the time allowed.

Show the solution
  1. Time to pay: 30 days from service. Counting convention used throughout: the day of service is excluded, so day 1 is 2 June and the 30-day period ends on 1 July 2026.
  2. Mr. Rao is an assessee in default from 2 July 2026 because the demand was unpaid after the last date. Interest runs from 2 July 2026.
  3. Interest runs from 2 July 2026 to 20 September 2026. Months touched are July, August and September, which is 3 months (September counts in full as a part month).
  4. Interest = ₹5,00,000 × 1% × 3 = ₹15,000.
  5. Consequence: until payment, the Assessing Officer could have recovered by adjusting any refund, by garnishee on his debtors or bank, or by sending a recovery certificate to the TRO.

Answer: Default interest is ₹15,000 (simple, at 1% per month or part month for 3 months). Mr. Rao was an assessee in default from 2 July 2026 and exposed to recovery proceedings.

Example 2

For tax year 2026-27, Ms. Shah's tax determined on regular assessment is ₹3,20,000. TDS and advance tax paid total ₹4,00,000. She filed her return on 31 July 2027, on or before the due date for filing. The refund was granted on 20 December 2027. Compute the refund and interest.

Show the solution
  1. Refund = ₹4,00,000 − ₹3,20,000 = ₹80,000.
  2. 10% test (applies to refund of TDS and advance tax): 10% of ₹3,20,000 = ₹32,000. The refund of ₹80,000 is not less than this, so interest is allowed.
  3. Filing check: the return was filed on 31 July 2027, on or before the due date, so it is not late. The start date is therefore 1 April 2027, the 1 April following tax year 2026-27, and not the filing date.
  4. End date: 20 December 2027. Months touched: April to December 2027 = 9 months (December counts in full).
  5. Interest = ₹80,000 × 0.5% × 9 = ₹3,600.
  6. Total received = ₹80,000 + ₹3,600 = ₹83,600.

Answer: Refund is ₹80,000 and interest is ₹3,600, so ₹83,600 is received in total.

Exam tips

  • In case-scenario MCQs, check the dates first. Most traps are the 30-day period and the part-month rule.
  • In written answers, name the mode of recovery that fits the facts. Do not list all modes without linking them to the case.
  • Always show the interest formula and month count. Examiners award marks for method even when the final figure differs.
  • For TRO questions, write the full sequence from certificate to sale. Mention the gap after proclamation: 30 days for immovable property and 15 days for movable property.
  • Do not quote section numbers unless you are sure of them. State the rule in plain words with its condition.

Practice questions from Deduction, Collection and Recovery of Tax

Recovery of Tax and Refunds in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Recovery of Tax and Refunds: frequently asked questions

Who is the Tax Recovery Officer and what does he do?

The Tax Recovery Officer is an income-tax authority who recovers arrears on a certificate sent by the Assessing Officer. He can attach and sell movable and immovable property, arrest and detain the defaulter, and appoint a receiver. He follows the recovery procedure in the Schedule to the Act.

What is the time limit to pay a tax demand after notice?

You must pay within 30 days of service of the notice of demand. After that, you are an assessee in default and owe 1% simple interest per month or part of a month. You can ask the authority for a stay or for payment in instalments.

How is interest on refund calculated?

Interest is simple, at 0.5% per month or part of a month. For TDS, TCS and advance tax refunds it runs from 1 April following the tax year (or the filing date if the return is late) to the date of grant. For other refunds it runs from the date of payment.

Can the department adjust my refund against an old demand?

Yes. If a refund is due and an earlier demand is outstanding, the department can set off the refund against the demand after giving you notice. Any balance of the refund is then paid to you.