Interest on Income Tax Refunds: Report It Under “Other Sources”
- Farheen Mukadam
- Aug 12
- 9 min read
When filing your Income Tax Return (ITR) and awaiting a refund, it’s important to understand how interest on the refund is handled. The Income Tax Department may pay interest on your refund if you have overpaid taxes during the financial year. However, the question of whether this interest is taxable or not, and how it affects your tax filing, is something that every taxpayer should know. Let us explore the taxability of interest on income tax refunds, how it is calculated, and where it should be reported in your ITR. Additionally, we will cover how the ITR filing deadline impacts this interest and provide a clear example of how refund interest is calculated. By the end of this guide, you will be equipped with the knowledge to accurately handle your income tax refunds and any interest earned on them.
Table of Contents
Interest on Income Tax Refunds: Taxable or Not?
Interest on income tax refunds, under Section 244A of the Income Tax Act, is generally paid by the Income Tax Department when the taxpayer has paid excess taxes and the refund is processed after the original due date. This interest is credited to the taxpayer as compensation for the delay in processing the refund.
While this interest is paid on the refund amount, it is taxable in the hands of the taxpayer. The interest income is added to your total income for the year and is subject to tax according to the applicable income tax slabs. It is important to note that this interest is treated as “other income” and is taxed under the head "Income from Other Sources" in your ITR.
The rate of interest on refunds is determined based on the period the refund remains outstanding, and the rate is specified by the Income Tax Department for each financial year.
Interest Calculation on Tax Refunds
The interest on an income tax refund is calculated at a rate of 0.5% per month for the period between the date of filing the return and the date of issuance of the refund. This interest is provided for any delays in the refund process by the tax department. The key points regarding interest calculation are:
Eligibility for Interest: Interest is paid if the refund is processed after the due date for processing the return. The interest is calculated from the date of filing your return (after the due date) until the date the refund is issued.
Maximum Period: The maximum period for which interest is calculated is determined by the period of delay in issuing the refund, up to a maximum of 3 months.
Compounding of Interest: The interest is compounded monthly, which means that the interest for each month is calculated on the cumulative refund amount, including any interest added in previous months.
For example, if the taxpayer is due a refund in April, but the refund is issued in July, interest will be calculated for the period between April and July, with the rate of 0.5% per month applied to the outstanding refund amount.
Where to Report Interest on Refund
Interest on income tax refunds must be reported under the section “Income from Other Sources” in your ITR. Specifically, you would include this amount under the head “Interest on Income Tax Refund” when filing your return.
For ITR-1 (Salaried Individuals): Report the interest under “Income from Other Sources,” which is included in the summary of your total income.
For ITR-2, ITR-3, ITR-4, etc. (for business/professionals): Similarly, you must report interest on the income tax refund under the appropriate section for “Income from Other Sources.”
It is crucial to mention this interest income correctly, as failing to do so may lead to discrepancies in your tax filing and potential penalties.
Impact of ITR Filing Deadline on Interest Calculation
The filing deadline plays an important role in determining when you will be eligible for interest on your income tax refund. If you file your return after the due date, you may be entitled to interest on the refund for the period between the date of filing and the actual refund issuance.
If the ITR filing deadline is missed, the tax department may also levy penalties or interest for the delayed filing. However, even if the filing is delayed, the refund interest is still calculated based on the delay caused by the tax department’s processing time. The interest provided is meant to compensate for the delayed refund process rather than the delay in filing the return.
Example of Interest Calculation on Income Tax Refunds
Let’s say you filed your ITR for the Financial Year 2024-25 on October 15, 2025, and the due date for filing was July 31, 2025. Your refund of ₹50,000 is processed and issued on November 15, 2025.
Here’s how interest on the refund would be calculated:
Period of delay: From August 1, 2025, to November 15, 2025 (about 3.5 months).
Interest Rate: 0.5% per month (compounded monthly).
Refund Amount: ₹50,000.
The interest calculation will be as follows:
Interest for the first month (August) = ₹50,000 x 0.5% = ₹250
Interest for the second month (September) = ₹50,250 x 0.5% = ₹251.25
Interest for the third month (October) = ₹50,501.25 x 0.5% = ₹252.51
Interest for the half month (November) = ₹50,753.76 x 0.25% = ₹126.88
Total Interest = ₹250 + ₹251.25 + ₹252.51 + ₹126.88 = ₹880.64
So, in addition to the ₹50,000 refund, you would receive approximately ₹880.64 as interest for the delay in processing.
Tax Implications of Interest on Refund
Interest on income tax refunds is considered taxable under “Income from Other Sources.” This means the total interest you receive will be added to your income and taxed as per your applicable tax slab.
For example:
If you are in the 30% tax bracket, the ₹880.64 of interest you earned would be taxed at 30%.
If you are in a lower tax bracket (e.g., 10% or 20%), the interest will be taxed accordingly.
This taxable interest can increase your total taxable income, potentially pushing you into a higher tax bracket if your overall income crosses the taxable threshold. Therefore, it is important to consider the taxability of refund interest when preparing for the upcoming tax filing season.
How TaxBuddy Can Help with ITR Filing and Reporting Refund Interest
TaxBuddy makes the process of reporting and calculating income tax refund interest easier by automating the calculations and integrating them directly into your ITR filing process. With TaxBuddy’s AI-driven platform, you can accurately report interest on income tax refunds without the risk of missing out on important tax details.
TaxBuddy also helps you manage your tax filing by identifying deductions, exemptions, and credits that can reduce your taxable income, ensuring that the tax on refund interest is minimized. With step-by-step guidance, TaxBuddy makes the process smooth and error-free, so you don’t have to worry about missing crucial tax filing details.
Conclusion
Interest on income tax refunds is an important factor to consider when filing your ITR. It is taxable and must be reported correctly under “Income from Other Sources” to avoid discrepancies. Understanding how the interest is calculated and its tax implications helps you stay compliant and manage your finances more effectively. Platforms like TaxBuddy make the process simpler by automating these calculations and ensuring that you file accurately, saving you time and effort.
For anyone looking for assistance in tax filing, it is highly recommended to download theTaxBuddy mobile app for a simplified, secure, and hassle-free experience.
FAQs
Q1: Does TaxBuddy offer both self-filing and expert-assisted plans for ITR filing, or only expert-assisted options?
Yes, TaxBuddy offers both self-filing and expert-assisted plans. The self-filing plan allows users to file their returns independently with the help of the platform’s tools and guidance. It's ideal for individuals who are confident in handling their tax filing but still need an intuitive system to manage the process. On the other hand, the expert-assisted plan is for those who prefer professional help. With this plan, TaxBuddy’s qualified tax experts assist in filing the return, ensuring accuracy, optimizing deductions, and complying with all tax regulations. This flexibility helps cater to different needs, whether you want to file on your own or seek expert assistance.
Q2: Which is the best site to file ITR?
The best site to file your Income Tax Return (ITR) depends on your preferences and the complexity of your tax situation. The official Income Tax Department portal is a reliable option for basic returns. However, platforms like TaxBuddy offer additional features such as AI-driven tax filing, error-free filing, and professional support to ensure compliance. TaxBuddy is an excellent choice for those looking for a seamless filing experience, as it simplifies the process and provides expert guidance throughout the filing.
Q3: Where to file an income tax return?
You can file your Income Tax Return on the official Income Tax Department portal at incometax.gov.in, which is the government-approved platform. However, if you prefer a more user-friendly interface and the added benefit of professional assistance, TaxBuddy is an excellent alternative. TaxBuddy offers both self-filing and expert-assisted options, ensuring that even complex returns can be filed smoothly with minimal hassle.
Q4: Can I file my ITR after the deadline without penalties?
No, you cannot file your ITR after the deadline without penalties. If you miss the filing deadline, you can still file a belated return, but you will be subject to penalties and interest on any unpaid taxes. The penalty for late filing is up to ₹5,000, depending on when the return is filed. Additionally, interest will be charged under sections 234A, 234B, and 234C for any outstanding taxes. Therefore, it’s always recommended to file your return before the due date to avoid penalties and interest.
Q5: What happens if I fail to file ITR within the extended deadline?
If you miss the extended deadline of September 15, 2025, for FY 2024-25 (Assessment Year 2025-26), you can still file a belated return by December 31, 2025. However, filing after the deadline will result in penalties and delayed refund processing. A belated return also doesn’t allow you to carry forward certain deductions or losses, which can affect future tax savings. Filing on time ensures that your tax filing is processed faster, and you avoid unnecessary penalties.
Q6: How do I check the status of my income tax refund?
You can check the status of your income tax refund on the official Income Tax Department portal by entering your PAN and assessment year details. Alternatively, TaxBuddy also provides an easy way to track the refund status if you file through their platform. Once your return is filed, you can check updates on the refund process directly from the TaxBuddy dashboard. This way, you will stay informed about the progress of your refund at every stage.
Q7: Does TaxBuddy assist with TDS credit verification?
Yes, TaxBuddy provides support for TDS (Tax Deducted at Source) credit verification. TDS credits need to be accurately reflected in your return to avoid any mismatches, which could delay the processing of refunds. TaxBuddy’s platform helps ensure that the TDS credits shown on your Form 26AS match with the deductions claimed in your ITR. The system alerts you if there is any discrepancy, allowing you to rectify it before submitting the return. This reduces the chances of delays in refund processing.
Q8: How long does it take for TaxBuddy to process an ITR filing?
The processing time for ITR filing through TaxBuddy can vary depending on the complexity of your tax return. For straightforward filings, the process can be completed within a few hours. For more complicated returns, especially those that require expert assistance, the process may take a few days to ensure all details are correctly verified. However, TaxBuddy aims to process returns efficiently and provides timely updates so that you are informed of your filing status at every step.
Q9: What if I file ITR after the extended deadline?
If you file your ITR after the extended deadline, you can still submit a belated return by December 31, 2025. However, filing after the deadline will incur penalties, and the refund processing will be delayed. The penalty for late filing can be up to ₹5,000, depending on when you file. In addition, interest will be charged on unpaid taxes under sections 234A, 234B, and 234C. It's always better to file as soon as possible to avoid these additional charges and ensure faster processing of your refund.
Q10: Are there penalties for errors in my ITR filing?
Yes, errors in your ITR filing can result in penalties, interest, and delays in processing. Common mistakes include incorrect income reporting, missing deductions, or failing to report all sources of income. The tax authorities may issue notices for discrepancies, and you may be required to file a revised return. These errors can lead to penalties and interest on unpaid taxes. To avoid these issues, it’s recommended to use platforms like TaxBuddy, which offer error-checking features and professional assistance to ensure accurate filings.
Q11: Can I make corrections in my ITR after filing?
Yes, if you discover errors in your ITR after filing, you can file a revised return. The revised return allows you to correct mistakes such as incorrect income, missed deductions, or TDS credits that were not included in the original filing. The revised return must be filed before the end of the assessment year. Filing a revised return helps ensure your tax return is accurate and prevents penalties associated with incorrect filings.
Q12: Does TaxBuddy support all tax regimes for ITR filing?
Yes, TaxBuddy supports both the old and new tax regimes, allowing you to choose the one that provides the most benefit based on your financial situation. The platform helps you evaluate your eligibility for each tax regime and assists in selecting the option that offers the best savings. Whether you are eligible for exemptions under the old tax regime or prefer the simplified new tax regime, TaxBuddy helps ensure you file accurately and maximize your tax benefits.
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