Jigar M. Patel
International Tax Attorney
Refund of Excess Tax Paid
Situations commonly arise, where considering the amounts of Tax Deducted at Source (TDS) or Tax Collected at Source (TCS) or Advance Tax paid in case of taxpayers, they become entitled to claim a Refund of Income-tax, where the amount of such taxes actually exceed the income-tax liability on the taxable income for the relevant assessment year. Section 237 of the Income-tax Act provides for grant of Refund, in cases where there has been excess payment of tax by the taxpayers.
How is the Refund Processed?
The Centralized Processing Centre (CPC) of the Income-tax Department processes these claims after electronically verifying the Income-tax Return (ITR) of the taxpayer. The refund process today is seamless, technology-driven and relatively quick.
Once an ITR is filed and verified, CPC reassesses the computation using its automated system under Section 143(1). If the system determines that taxes paid exceed taxes due, a refund is automatically initiated. The amount is credited directly to the taxpayer’s bank account via the refund banker system, ensuring both speed and accuracy. Maintaining a pre-validated bank account on the e-filing portal is, therefore, essential.
Time Limit for Claiming Refund
Section 239 requires that every claim for refund shall be made by furnishing an ITR in accordance with the provisions of Section 139. The deadline for filing an ITR is three months before the end of the relevant assessment year. Accordingly, the claim for refund in respect of any tax paid, deducted or collected during the Financial Year 2024-25, should be made in the ITR required to be filed for the Assessment Year 2025-26, not later than 31st December, 2025.
Grant of Interest on Refund
Interest at 6% per annum (half a per cent per month) is statutorily provided under Section 244A. However, taxpayers need not be surprised if they do not receive interest on every refund claimed. This is because the section provides that if the amount of refund allowable is less than 10% of the tax payable on the assessed income, no interest shall be paid. This corresponds to a similar provision under which interest is not charged from a taxpayer, if the shortfall of tax paid is within the margin of 10%.
Computation of Interest
Interest on refund is calculated from 1st April of the relevant assessment year to the date the refund is granted, subject to the condition that the ITR has been filed within the time-limit prescribed. In case of a belated ITR, interest is granted only from the date of its filing. Where refund is on account of excess payment of self-assessment tax, interest is calculated from the date of payment of such tax. For purposes of computation of interest, part of a month is treated as a whole month.
Set-off of Refund against Outstanding Demand
Under Section 245, taxpayers can be served a notice, that their refund for the relevant year is proposed to be set off or adjusted against an outstanding tax demand in their case for any earlier year. Response of the taxpayer in this regard is sought within a stipulated time under the notice.
In such cases, taxpayers would be well advised to check whether such demand is actually correct, relates to them and is still outstanding. If they believe that the demand is incorrect or only partially correct, a timely response should be submitted on the e-proceedings portal, along with supporting documents.
In cases of any pending assessment or reassessment against a taxpayer, the income-tax department is empowered to withhold the refund, even if there is no pending demand, until such assessment is completed.
