Interest on Excess Income Tax Refund – Section 234D

At times it may happen that the assessee is granted an excess income tax refund. Section 234D of Income Tax Act provides for levy of interest on excess refund granted to the taxpayer. This article elaborates on the various provisions relating to interest on excess income tax refund granted to an assessee. Know more about Income Tax Refund Status.

Section 234D – Interest on Excess Refund

Under the provision of section 234D, if an assessee has paid excess tax, then he/she can claim the refund of the same in his return of income and it will be refunded to him. Know more about Income Tax Returns and Forms and Calculating Salary for Income Tax Return Filing Many times it may happen that an assessee is granted a refund at initial stage, that is at the time of intimation under the provision of section 143(1) and at a later stage that is on the regular assessment, the refund will be reduced. In such a case the excess refund is recovered from the assessee along with interest under section 234D. Under section 234D interest is levied if any refund is granted to the taxpayer under section 143(1)

No refund is due on regular assessment
Amount refunded under section 143(1) exceeds the amount refundable on regular assessment

Regular assessment

Regular assessment means that an assessment under section 143(3) that is the scrutiny assessment or best judgment assessment under section 144. Assessments made for first time under section 147 or section 153A will also be treated as regular assessment. Know more about Appeal to Commissioner of Income Tax

Rate of interest under section 234D

Rate of interest under section 234D is levied at half percentage (½ %) per month or part of the month.

Period of impose of interest

Interest is imposed from the date of grant of refund under the section 143(1) till the date of regular assessment.

Adjustment under Section 234D (2)

Where, as a result of an orders under the following sections, an order of the Settlement Commission under sub-section (4) of section 245D and the amount of refund granted under sub-section (1) of section 143 are held to be correctly allowed, either in whole or in part, then the interest chargeable, if any, under subsection (1) of Section 234D will be reduced accordingly.

Section 154 - Rectification of mistake
Section 155 - Other amendments
Section 250 - Procedure in appeal
Section 254 - Orders of Appellate Tribunal
Section 260- Decision of High Court or Supreme Court on the case stated
Section 262 -Hearing before Supreme Court
Section 263 - Revision of orders prejudicial to revenue
Section 264 - Revision of other orders

Manner of computing interest under Section 119A

After learning about interest on excess refund under the provisions of section 234D, it is important to understand the manner of computation of interest under the provisions of section119A of Income-tax Act. According to section 119A, computation of interest payable by the assesse or the interest payable by the Central Government to the assesse is explained in details here.

Interest calculation on annual basis

In case of calculating the interest on an annual basis, the period for which the interest is to be calculated will be rounded off to a whole months. For this purpose, the fraction of month comprised in a period will be ignored and the interest will be calculated based on the rounded off period.

Interest calculation on monthly basis

Calculating interest for a month or part of month comprised in a period, any fraction of a month will be deemed to be a full month and the interest will be calculated based on the full month.

Amount rounded off to one hundred

The amount of tax in respect of interest to be calculated will be rounded off to the nearest multiple of hundred rupees. For this purpose any fraction of Rs.100 will be ignored and the amount so rounded off will be deemed to be the amount in respect of interest is to be calculated.

Example:

For better understanding about the calculation of interest on excess income tax refund, refer to the example below: If a person is calculating interest under section 119A on Rs. 8490 for 4 months and 11 days, then any fraction of Rs. 100 need to be ignored and, hence, we will ignore Rs. 90 from Rs. 8490 and the balance amount will come to Rs. 8400, thus interest under section 119A will be computed on Rs. 8,400. Further, the period of 11 days will be considered as full month and the interest will be computed for 5 months. Interest Rate for Income Tax Refund is explained under section 244A.