Refund of Income Tax – Who, When and How ?

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A tax refund arises when a taxpayer pays tax in excess of what he owed to the income tax authorities. Usually, a taxpayer pays taxes in the form of withholding taxes, advance taxes, self-assessment taxes, etc.

Tax refund can only be claimed by filing the Income Tax Return and it usually takes upto 2-6 months to process the refund amount.

Through this blog, I would cover various provisions relating to claim of refund of excess tax paid by the taxpayer.

Basic provisions

When the tax paid by the taxpayer (could be in the form of advance tax or tax deducted/collected at source or self-assessment tax or payment of tax on regular assessment) is more than the required amount, he will be eligible to claim refund of the excess tax paid by him.

When does the refund arise?

If any person satisfies the Assessing Officer that the amount of tax paid by him or on his behalf or treated as paid by him or on his behalf for any year exceeds the amount of tax payable by him, he shall be entitled to a refund of the excess tax paid by him.

Person entitled to claim refund

In the normal course, the person who has paid the tax is entitled to claim the refund of excess tax paid by him. There are certain special cases in which the refund is to be claimed by a person other than the payer.

As per income tax laws, the following persons are entitled to claim refund of tax:

  1. Where the income of one person is included in the total income of another person under any provision of the Act (i.e., as per the clubbing provisions, e.g., income of minor child clubbed with the income of parent), the latter shall be entitled to a refund in respect of the clubbed income.

  2. Where through death, incapacity, insolvency, liquidation or other cause, a person is unable to claim or receive any refund due to him, his legal representative or the trustee or guardian or receiver (as the case may be), shall be entitled to claim or receive such refund for the benefit of such person or his estate.

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How to claim refund?

In the normal course, refund is to be claimed in the return of income itself and no special form is to be submitted to claim the refund.

The claim of refund is to be made within one year from the last day of the assessment year.

Refund on appeal

In a case where the refund becomes due as a result of any order passed in appeal or other proceeding under the Act, the Assessing Officer shall refund the amount to the taxpayer without his having to make any claim in that behalf.

However, where –

  • an assessment is set aside or cancelled and an order of fresh assessment is directed to be made, the refund, if any, shall become due only on the making of such fresh assessment.

  • an assessment is annulled, the refund shall become due only of the amount of the tax paid in excess of the tax chargeable on the total income returned by the taxpayer.

Interest on delayed refund

Many times the taxpayer does not get the refund in due time, in such a case, he is granted interest on delayed refund. The provisions in this regard are as follows:

  • Where the refund arising to the taxpayer is out of any tax deducted/collected at source or tax paid by way of advance tax, then the taxpayer shall be entitled to interest calculated at the rate of one-half percent for every month or part of a month. Interest in such a case 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 to the taxpayer. However, no interest shall be payable if the amount of refund is less than 10% of the tax as determined under section 143(1) or tax determined under regular assessment. In other words, interest is payable only when the amount of refund due is more than 10% of the tax payable by tax payer.

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It is to be noted that even a part of a month is considered as full month for interest calculation purposes.

E.g., if a taxpayer has claimed an interest of INR 3,000 for AY 2016-17 and it has received the refund in the month of February 2017 then the interest will be calculated from April 2016 to February 2017.

  • In any other case (i.e., a case in which refund is due to reasons other than those stated above), interest shall be calculated at the rate of one-half percent for every month or part of a month. Interest in such a case shall be allowed for a period commencing from the date/dates (as the case may be) of payment of the tax or penalty to the date on which the refund is granted. The expression “date of payment of tax or penalty” means the date on and from which the amount of tax or penalty specified in the notice of demand issued under section 156 is paid in excess of such demand.

No interest in certain cases

The taxpayer will not be entitled to any interest on refund, if the proceedings resulting in the refund are delayed for the reasons attributable to the taxpayer (whether wholly or in part). In such a case, the period of the delay so attributable to him shall be excluded from the period for which interest is payable. Where any question arises as to the period to be excluded, it shall be decided by the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner whose decision thereon shall be final.

Variation in the amount of refund

Where, as a result of an order under the provisions of the Income Tax Act (Scrutiny proceedings under section 143(3) or section 144 or section 147 or section 154 or section 155 or section 250 or section 254 or section 260 or section 262 or section 263 or section 264 or an order of the Settlement Commission under section 245D(4)), the amount on which interest was payable has been increased or reduced (as the case may be), then the interest shall be increased or reduced accordingly.

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In a case where the interest is reduced, the Assessing Officer shall serve on the taxpayer a notice of demand in the prescribed form specifying the amount of the excess interest paid and requiring him to repay such amount.

Power of tax authorities to set-off the refund

At times, it may happen that, refund may be due to the taxpayer for some assessment year(s) and there may be some tax demand remaining payable by the taxpayer. In such a case, the tax authorities authorized in this regard, may, in lieu of payment of the refund to the taxpayer, set off the amount to be refunded or any part of that amount against the sum, if any, remaining payable by the person to whom the refund is due. However, such an action can be done only after giving an intimation in writing to such person of the action proposed to be taken.

Tracking your income tax refund

The income tax department allows the taxpayer to track the status of their refund. If the refund procedure has not been completed by the Assessing Officer, the taxpayer will receive a message notifying the same.

Modes of getting refund

  1. Get Refund through Direct Transfer:

Excess tax paid can be refunded to the taxpayer by crediting their bank account with ECS transfer. RTGS / NECS are also used to transfer the tax refund directly into the taxpayer’s account, using his/ her 10-digit account number and MICR code, through the State Bank of India. The taxpayer can track his/ her income tax refund from the income tax departmental website or through NSDL-TIN website by clicking on “Status of Tax Refunds”. The taxpayer would then need to enter his/ her Permanent Account Number (PAN) and assessment year for refund details.

  1. Refund by cheque :

The taxpayer can also track the refund with the speed post service that has been tasked with delivering it, using the reference number that the IT department will give him/ her.