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Direct Tax Laws and International Taxation · Collection, Recovery and Refund of Tax

Refunds and Interest on Refunds under the Income-tax Act, 2025

Updated 11 October 2026 · Fact-checked

A refund arises when tax paid exceeds tax due. Under the Income-tax Act, 2025, the Department may set it off against other dues (section 438) or withhold it while assessment is pending. If it is delayed, you earn simple interest at 0.5% per month or part of a month (section 437). Identify the Table row, find the period, count months, then apply 0.5%.

Understand Refunds and Interest on Refunds

A refund is money the Department returns because you paid more tax than your liability. It usually arises from excess TDS, TCS or advance tax, from tax paid on self-assessment or regular assessment beyond what is due, or from an appeal or rectification order that reduces the demand.

The Act deals with two things. Section 438 says what the Department can do with the refund: set it off against tax still payable, or withhold it in some cases. Section 437 says what the Department owes you if it holds your money: interest.

Under section 438(1), when a refund is due, the Assessing Officer or a senior authority named in the section may, instead of paying it, set off the refund (or part of it) against any sum remaining payable by you under this Act. The set-off can also be against a sum payable under the Income-tax Act, 1961, as the section now reads. Before doing this, the department must give you a written intimation of the proposed action (section 438(2)).

Withholding is different. Under section 438(3), if assessment or reassessment proceedings are pending, the Assessing Officer may withhold the refund. This needs reasons recorded in writing and the previous approval of the Principal Commissioner or Commissioner. The withholding can run up to sixty days from the date on which the assessment or reassessment is made.

Interest compensates you for the time the Department holds your money. It is simple interest at 0.5% for every month or part of a month. The start date depends on the source of the refund, so the Table in section 437(1) is the heart of every numerical question.

Key rules to remember

Basic interest on refund
Interest = Refund amount × 0.5% × number of months (or part of a month)
Simple interest, section 437(1). Part of a month counts as a full month. Interest runs on the refund amount.
Row 1: TCS, advance tax, tax treated as paid under section 390(5)
Return filed on or before due date under section 263(1): from 1 April of the year following the tax year to the date of grant. Otherwise: from the date of furnishing the return to the date of grant.
Applies to refunds out of tax collected at source under section 394, advance tax, or tax treated as paid under section 390(5), during the financial year.
Row 2: Tax paid under section 266
Period = later of (date of furnishing return, date of payment of tax) to the date of grant
Interest starts from whichever date is later.
Row 3: Any other case
Period = date(s) on which tax or penalty in the demand notice under section 289 was paid in excess of the demand, to the date of grant
Typical for excess payment against a demand notice.
Minimum refund threshold
No interest under Row 1 or Row 2 if refund < 10% of the tax determined under section 270(1) or on regular assessment
Section 437(2). Does not apply to Row 3.
Refund on application under section 288(1)
Interest at 0.5% per month or part of month from the date of application to the date of grant
Section 437(3), for Row 1 refunds arising from an order on an application under section 288(1).
Additional interest on appellate and similar orders
Additional interest = Refund × 3% p.a. for the period from the day after the time allowed under section 286(1) expires to the date of grant
Section 437(4). Applies when the refund arises by giving effect to an order under sections 359, 363, 365(10), 368, 377 or 378 otherwise than by fresh assessment or reassessment. It is in addition to interest under sub-section (1).
Refund to a deductor
Interest at 0.5% per month or part of month from the date of claim for refund (or date of tax payment where the refund arises from an order) to the date of grant
Section 437(6), for amounts paid to the Central Government under Chapter XIX-B.
Exclusion of assessee's delay
Period of delay attributable to the assessee or deductor is excluded
Section 437(7). Disputes on the period to be excluded are decided by the senior authority named in section 437(8), and the decision is final.
Withholding limit
Withhold up to 60 days from the date of assessment or reassessment
Section 438(3). Needs recorded reasons and previous approval of the Principal Commissioner or Commissioner.

How to solve Refunds and Interest on Refunds questions

Use this sequence for any refund and interest question. It keeps you inside the section 437 and 438 framework and protects marks even if the arithmetic slips.

  1. 1Identify the source of the refund: TDS/TCS or advance tax, tax paid under section 266, or excess payment against a demand notice. This fixes the Table row.
  2. 2Check the threshold. For Row 1 and Row 2, interest is nil if the refund is less than 10% of the tax determined under section 270(1) or on regular assessment.
  3. 3Fix the start date from the row. For Row 1, check whether the return was filed on or before the due date under section 263(1).
  4. 4Fix the end date: the date on which the refund is granted.
  5. 5Remove any period of delay caused by the assessee (section 437(7)).
  6. 6Count the months, treating any part of a month as a full month, then compute refund × 0.5% × months.
  7. 7Check for set-off against outstanding demand under section 438(1), after a written intimation, and for withholding under section 438(3) if assessment is pending.
  8. 8State the final amount payable, any additional interest under section 437(4), and the net refund after set-off.

Quickest way: Row, threshold, months, 0.5%

When to use it: Use in the objective section or in a short numerical where the start and end dates are given.

  1. Name the row (1, 2 or 3) in one line.
  2. Test the 10% threshold for Rows 1 and 2.
  3. Write the start and end dates and count months, rounding any part up.
  4. Multiply: refund × 0.005 × months.
  5. If a demand is outstanding, subtract it as set-off and state the net cash refund.

Common mistakes in Refunds and Interest on Refunds

  • Treating interest as compound or as an annual rate

    Students carry over rates quoted per annum from other topics.

    Fix: Section 437(1) gives simple interest at 0.5% per month or part of a month. Multiply by the number of months only.

  • Ignoring the part-of-a-month rule

    Students count exact days or fractions of months.

    Fix: Any part of a month is counted as a full month. Round the period up before multiplying.

  • Starting interest from the wrong date for TDS or advance tax refunds

    Students forget that the start depends on whether the return was filed on or before the due date under section 263(1).

    Fix: If filed on time, start from 1 April of the year following the tax year. If filed late, start from the date of furnishing the return.

  • Applying the 10% threshold to every refund

    Students remember the threshold but not its scope.

    Fix: Section 437(2) applies to Row 1 and Row 2 only. It does not apply to Row 3 refunds.

  • Confusing set-off with withholding

    Both stop cash going to the assessee.

    Fix: Set-off adjusts the refund against a sum payable, with written intimation (section 438(1) and (2)). Withholding holds the refund while assessment or reassessment is pending, needs recorded reasons and prior approval, and runs up to sixty days from the date of assessment (section 438(3)).

  • Giving the additional 3% interest on every refund

    Students notice the extra interest but skip its conditions.

    Fix: It applies only where the refund results from giving effect to an order under the listed sections, otherwise than by fresh assessment or reassessment. It is charged at 3% per annum for the period stated in section 437(4)(b), and the withholding period is excluded under section 437(5) where relevant.

Worked examples

Example 1

Ramesh Iyer, a resident individual, filed his return for tax year 2026-27 on or before the due date under section 263(1). His refund of ₹60,000 arises from excess TDS and advance tax. The tax determined on regular assessment is ₹4,00,000. The refund is granted on 20 August 2027. Compute the interest under section 437.

Show the solution
  1. Source: TDS and advance tax, so Row 1 of the Table applies.
  2. Threshold: 10% of ₹4,00,000 = ₹40,000. The refund of ₹60,000 is not less than ₹40,000, so interest is payable.
  3. Return was filed on or before the due date, so interest runs from 1 April of the year following the tax year, that is 1 April 2027, to the date of grant, 20 August 2027.
  4. Months: April, May, June, July = 4 full months. 1 to 20 August is a part of a month, counted as 1 month. Total = 5 months.
  5. Interest = ₹60,000 × 0.5% × 5 = ₹1,500.

Answer: Interest payable is ₹1,500, so the total paid is ₹61,500.

Example 2

Meera Textiles Ltd is due a refund of ₹2,00,000 for tax year 2026-27. A demand of ₹75,000 for an earlier year is outstanding. The Assessing Officer wants to adjust it. Separately, another refund of ₹30,000 arises from advance tax, and the tax determined on regular assessment is ₹5,00,000. Explain the position on set-off and on interest for the ₹30,000 refund.

Show the solution
  1. Set-off: under section 438(1), the officer may set off the refund, or part of it, against the sum remaining payable by the company. A written intimation of the proposed action must be given first (section 438(2)).
  2. Set-off of ₹75,000 leaves a net refund of ₹2,00,000 − ₹75,000 = ₹1,25,000.
  3. If assessment or reassessment is pending, the officer may also withhold the refund under section 438(3), with reasons recorded in writing and the previous approval of the Principal Commissioner or Commissioner. Withholding can run up to sixty days from the date of the assessment or reassessment.
  4. Interest on the ₹30,000 refund: it arises from advance tax, so Row 1 applies. The threshold is 10% of ₹5,00,000 = ₹50,000.
  5. ₹30,000 is less than ₹50,000, so under section 437(2) no interest is payable.

Answer: The officer may set off ₹75,000 after written intimation, leaving ₹1,25,000 to be refunded (or withheld as above if assessment is pending). No interest is payable on the ₹30,000 advance-tax refund because it is below 10% of the tax determined.

Exam tips

  • In numericals, write the Table row first. Examiners give marks for identifying the correct row even if the arithmetic goes wrong.
  • Always test the 10% threshold for Row 1 and Row 2 before computing interest. A refund below the threshold earns no interest.
  • Count any part of a month as a full month, and state that you have done so.
  • In theory questions on set-off versus withholding, quote the conditions: written intimation for set-off, and recorded reasons plus previous approval for withholding.
  • Check for assessee-caused delay. If the facts mention a late reply or adjournment sought by the assessee, exclude that period under section 437(7).

Practice questions from Collection, Recovery and Refund of Tax

Refunds and Interest on Refunds in other exams

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

Refunds and Interest on Refunds: frequently asked questions

What is the rate of interest on income tax refund under the Income-tax Act, 2025?

It is simple interest at 0.5% for every month or part of a month, under section 437(1). The start date depends on the Table row that fits the refund. The period ends on the date the refund is granted.

Can the Assessing Officer adjust my refund against old tax dues?

Yes. Under section 438(1), the refund can be set off against any sum remaining payable under this Act, or under the Income-tax Act, 1961. The officer must first give you a written intimation of the action proposed.

How long can a refund be withheld?

If assessment or reassessment is pending, the Assessing Officer may withhold the refund up to sixty days from the date on which the assessment or reassessment is made. This needs reasons recorded in writing and the previous approval of the Principal Commissioner or Commissioner.

Is interest payable on every refund?

No. For refunds under Row 1 and Row 2 of the Table, no interest is payable if the refund is less than 10% of the tax determined under section 270(1) or on regular assessment. Interest also excludes any period of delay attributable to the assessee.

Is there extra interest on refunds arising from appeal orders?

Yes, in specified cases. Where a refund arises by giving effect to an order under the sections listed in section 437(4), otherwise than by fresh assessment or reassessment, additional interest at 3% per annum is payable on the refund for the period stated in that sub-section. It is over and above the 0.5% monthly interest.