Is Interest on Income Tax Refund Taxable?
- PRITI SIRDESHMUKH
- Oct 31, 2025
- 9 min read
When an income tax refund is issued by the Income Tax Department, it may include an additional component — interest. This interest compensates for the delay in refunding the excess tax paid. However, many taxpayers are unaware that this interest is not exempt. Under Section 244A of the Income Tax Act, any interest received on an income tax refund is considered taxable income. It must be declared under “Income from Other Sources” in the year it is received to ensure compliance and avoid future notices.
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Understanding Interest on Income Tax Refund
When a taxpayer pays more tax than their actual liability—either through advance tax, self-assessment tax, or TDS/TCS deductions—they become eligible for a refund once the Income Tax Department processes their return. However, delays can occur in refund issuance due to processing time, verification checks, or reassessment of data. To ensure fairness, the Income Tax Act provides for interest on such delayed refunds under Section 244A.
This interest is a form of compensation for the period during which the government held the taxpayer’s excess funds. The interest rate is typically 0.5% per month (or 6% per annum) and is calculated on the amount of refund due. The computation starts from the 1st of April of the assessment year or the date of tax payment, whichever is later, until the date the refund is actually issued.
For instance, if an individual filed an income tax return showing an excess payment of ₹20,000 and the department delays the refund by six months, the taxpayer would be entitled to interest of ₹600 (₹20,000 × 6% × 6/12). The interest amount is automatically calculated by the Income Tax Department and included in the total refund paid to the taxpayer.
The details of both the principal refund and the interest amount can be verified in Form 26AS or in the refund intimation order issued under Section 143(1). It is important to note that the interest received on the refund is taxable as “Income from Other Sources” and must be declared while filing the income tax return for the relevant financial year.
Overall, this provision ensures transparency and accountability in the tax refund process, giving taxpayers confidence that any delay in refund disbursal will be fairly compensated. Regularly checking the refund status and Form 26AS helps taxpayers stay updated on both refund credits and interest received.
Section 244A of the Income Tax Act: What It Covers
Section 244A governs the payment of interest on income tax refunds. It mandates that if the tax refund is delayed beyond a specified time, the taxpayer is entitled to receive simple interest at 0.5% per month (6% per annum) on the excess amount. This applies to refunds due after paying excess advance tax, TDS, or self-assessment tax. For cases where refund arises due to appellate orders or rectifications, the same rate applies from the date of payment of tax to the date of refund.
How Interest on Income Tax Refund Is Calculated
Interest under Section 244A is calculated from the 1st of April of the assessment year until the date the refund is granted. It is computed at 0.5% per month on the amount of refund. For example, if a taxpayer’s refund is ₹20,000 and the refund is issued six months after 1st April, the interest payable would be ₹20,000 × 0.5% × 6 = ₹600. In cases where the refund amount is less than 10% of the total tax payable, no interest is granted.
Is Interest on Income Tax Refund Taxable in 2025?
Yes, the interest received on income tax refunds is fully taxable in the financial year in which it is received. It is classified as “Income from Other Sources” under Section 56 of the Income Tax Act. Many taxpayers assume it to be tax-free since it originates from the government, but it must be included while filing the ITR and taxed as per applicable slab rates.
How to Report Interest on Refund While Filing ITR
The interest on refund must be reported under the “Income from Other Sources” schedule in your ITR. Taxpayers should check Form 26AS or AIS (Annual Information Statement) to verify the amount of interest credited by the Income Tax Department. It’s crucial to ensure that the declared interest matches the data available in AIS to prevent mismatches or notices. Platforms like TaxBuddy automatically extract this information from AIS and help pre-fill the correct amount while filing returns.
Tax Rate Applicable on Interest from Income Tax Refund
The interest earned on income tax refunds is taxed according to the taxpayer’s income slab rate. There is no special or concessional rate for such interest income. For instance, if you fall under the 20% tax bracket, the interest received will also be taxed at 20%, plus applicable cess and surcharge. It is not eligible for any deductions under Section 80TTA or 80TTB since it does not arise from a savings or fixed deposit account.
Common Mistakes Taxpayers Make While Reporting Interest Income
Taxpayers often ignore the small interest component mentioned in their refund order or AIS, assuming it to be non-taxable. Another frequent mistake is clubbing refund interest with bank interest income without proper distinction. Some also report only the refund amount and not the interest earned on it. These errors can lead to income mismatches between the ITR and AIS, possibly triggering scrutiny or a notice under Section 143(1).
How to Verify Interest Amount in Form 26AS and AIS
To verify the correct interest amount, taxpayers should log in to their income tax portal and download Form 26AS or check the AIS report. Under Form 26AS, the interest component is displayed separately from the refund amount. The AIS provides more detailed transaction-level data showing both refund issuance and interest credited. TaxBuddy integrates with these statements to ensure the right figures are picked up automatically during return preparation.
Example: Taxability of Interest on Income Tax Refund
Suppose a taxpayer’s total tax liability for FY 2024–25 was ₹1,00,000, but due to excess TDS, ₹1,20,000 was paid. After processing the return, a refund of ₹20,000 is issued along with ₹1,200 as interest under Section 244A. The ₹20,000 refund is not taxable, but the ₹1,200 interest must be added to “Income from Other Sources” and taxed as per the taxpayer’s slab rate in FY 2025–26.
Does TDS Apply to Interest on Income Tax Refund?
The Income Tax Department does not deduct Tax Deducted at Source (TDS) on the interest component of an income tax refund. When a taxpayer pays excess tax during a financial year—either through advance tax, self-assessment tax, or TDS—the department refunds the overpaid amount after processing the return. If there is a delay in issuing this refund, the taxpayer is entitled to receive interest under Section 244A of the Income Tax Act.
Although no TDS is deducted from this interest, the taxpayer is legally required to declare the interest income in the Income Tax Return (ITR) for the financial year in which it is received. The interest earned on an income tax refund is considered “Income from Other Sources,” and it is fully taxable at the applicable slab rate of the taxpayer. For instance, if a refund of ₹50,000 includes ₹2,000 as interest, that ₹2,000 must be reported separately in the ITR under the relevant income head.
It is also important to note that the interest is calculated from the date of excess tax payment until the date the refund is granted, and it appears in the Annual Information Statement (AIS) or Form 26AS. Taxpayers should cross-check this data while filing returns to ensure consistency and avoid mismatches that could lead to scrutiny or notices from the department.
In summary, while the department does not deduct TDS on the refund interest, it remains the taxpayer’s duty to include this amount as taxable income and pay the applicable tax, ensuring compliance and accurate reporting during the filing process.
How TaxBuddy Simplifies Reporting of Interest Income
TaxBuddy’s smart filing system automatically detects the interest on refunds from your AIS and Form 26AS. It pre-fills the correct value under the “Income from Other Sources” section and ensures that all income items are properly categorized. This eliminates manual errors and prevents notices caused by mismatches. TaxBuddy also provides expert-assisted options for reviewing refund-related tax entries and ensuring compliance.
Conclusion
Interest on income tax refunds is a small but important component of total taxable income. While the refund itself is not taxable, the interest earned on it must be disclosed under “Income from Other Sources.” Accurate reporting avoids future complications or notices from the department. Using expert-assisted services like TaxBuddy ensures all details, including interest on refunds, are filed accurately and in compliance with the law.
For anyone looking for assistance in tax filing, it is highly recommended to download the TaxBuddy mobile app for a simplified, secure, and hassle-free experience.
FAQs
Q1. What is interest on an income tax refund? Interest on an income tax refund is an additional amount paid by the Income Tax Department when your refund is delayed beyond the normal processing period. This payment compensates taxpayers for the time the government held their excess tax money. The provision for such interest is covered under Section 244A of the Income Tax Act, 1961.
Q2. At what rate is interest paid on income tax refunds? The Income Tax Department pays interest at the rate of 0.5% per month (equivalent to 6% per annum) on the amount of refund due. The calculation begins from the first day of April of the assessment year until the date the refund is actually granted. However, if the delay is due to the taxpayer’s fault, such as late filing of returns, the interest period is reduced accordingly.
Q3. Is the interest component of an income tax refund taxable? Yes, the interest earned on your income tax refund is fully taxable under the head "Income from Other Sources." It must be included in your gross total income for the relevant financial year in which the refund is received. You cannot claim any deduction or exemption against this income.
Q4. How can I check the interest amount on my refund? The breakup of your refund, including the interest component, is available in Form 26AS and the Annual Information Statement (AIS) on the Income Tax portal. These forms provide a clear distinction between the refund amount and the interest credited. TaxBuddy also offers an automated reconciliation feature that retrieves these details and helps verify them before filing your ITR.
Q5. Do I need to pay TDS on this interest income? No, the Income Tax Department does not deduct TDS on the interest component of a refund. However, you are required to disclose it as taxable income under "Income from Other Sources" while filing your return. The tax payable will depend on your applicable income tax slab rate.
Q6. How do I report refund interest while filing my ITR? The interest should be reported under “Income from Other Sources” in your Income Tax Return form. You can find this section in ITR-1, ITR-2, and ITR-3, depending on your income type. Filing through TaxBuddy simplifies this process by auto-importing your Form 26AS and AIS data and automatically adding the refund interest under the correct head of income.
Q7. Can I claim any deduction against this interest income? No, deductions under Sections 80TTA (savings interest) or 80TTB (senior citizen deposits) do not apply to interest received on tax refunds. This income is taxable in full without any offset or relief. The total interest received should be reported as it is in your ITR.
Q8. What if I forget to report interest on refund in my ITR? If you fail to report refund interest, the Income Tax Department may detect a mismatch through AIS or Form 26AS during processing. This can lead to a notice under Section 143(1)(a) for under-reporting income. To avoid such notices, platforms like TaxBuddy automatically identify and add refund interest details during filing.
Q9. Does every taxpayer get interest on a refund? No, not every taxpayer is eligible. Interest is payable only when the refund amount exceeds 10% of your total tax liability for the financial year. For smaller refunds, no interest is paid. The calculation and eligibility depend on how much excess tax was paid through TDS, advance tax, or self-assessment tax.
Q10. Is interest under Section 244A applicable for delayed TDS refunds? Yes, Section 244A applies to refunds resulting from any excess tax paid—whether through TDS, advance tax, or self-assessment tax. The interest is computed from the beginning of the assessment year or the date of excess payment, whichever is later, until the refund date.
Q11. Can businesses also receive interest on income tax refunds? Yes, businesses, firms, and companies can also receive interest on excess tax payments under Section 244A. The computation and taxability rules are the same as for individuals. The interest received by businesses must be declared as “Income from Other Sources” and taxed at the applicable business slab rate.
Q12. How does TaxBuddy help with refund and interest reconciliation? TaxBuddy automatically matches refund and interest data from the Income Tax portal with your Form 26AS and AIS. It identifies discrepancies, computes the taxable portion of interest, and ensures accurate reporting under “Income from Other Sources.” This eliminates manual effort, reduces the risk of notices, and ensures your refund and interest details are correctly reflected in your ITR for seamless compliance.
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