The excess tax paid in the form of advance tax or tax deducted/collected at source or payment of tax on regular assessment or either self – assessment tax can be claimed for refund by an assessee through Interest Income Tax Refunds. The return of income that provides the proof of payment of taxes like Advance Tax, TDS/TCS etc. needs to be filed electronically by an assessee in order to claim refund. In case the return has been filed after the due date, the assessee can still claim the tax refund. Interest income on income tax refunds
However, The simple interest is earned on the refund if the refund amount is at least 10% of the actual tax liability before tax deducted at source (TDS) as determined under regular assessment. The rate of simple interest is 6% per annum or 0.5% per month.
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If Refund is arising due to Advance Tax, TDS/TCS
“Interest shall be allowed for a period commencing from the 1st day of April of the assessment year to the date on which the refund is granted.”
If Refund is arising due to other reason
“Interest shall be allowed for a period from the date of payment of tax to the date of grant of refund.”
In case of the income arising from other sources, the interest earned on tax refunds will be chargeable to tax. Hence, unfortunately paying extra tax and then getting it back refunded is not a good choice to make. The interest earned in this case would be merely 6% pre-tax whereas you could get 9-10% pre-tax by investing your money in other instruments such as fixed deposits.
Further more, in case the assessee claims a very high amount of tax refund, the department may select the income return for scrutiny assessment. In case of any doubt, after intimating the assessee in writing, the department may set off any tax demand remaining payable against the amount to be refunded. Interest income on income tax refunds