Interest on excess refund.
426(1)
Subject to the other provisions of this Act, where any refund is granted to the assessee under section 270(1), and—
- (a) no refund is due on regular assessment; or
- (b) the amount refunded under section 270(1) exceeds the amount refundable on regular assessment, the assessee shall be liable to pay simple interest at the rate of 0.5% on the whole or the excess amount so refunded, for every month or part of a month comprised in the period from the date of grant of refund to the date of such regular assessment.
426(2)
Where, as a result of an order under section 287 or 288 or 359 or 363 or 365(10) or 368 or 377 or 378, the amount of refund granted under section 270(1) is held to be correctly allowed, either in whole or in part, then, the interest chargeable, if any, under sub-section (1) shall be reduced accordingly.
426(3)
Where in relation to a tax year, an assessment is made for the first time under section 279, the assessment so made shall be regarded as a regular assessment for the purposes of this section.
Section Summary:
Section 426 of the new income tax law deals with the interest payable by taxpayers on excess refunds granted to them. If a taxpayer receives a refund under Section 270(1) but it is later determined that no refund was due or that the refunded amount exceeds what should have been refunded after a regular assessment, the taxpayer must pay interest on the excess amount. The interest is calculated at 0.5% per month (or part of a month) from the date the refund was granted until the date of the regular assessment.
Key Changes:
- Interest Rate: The section introduces a specific interest rate of 0.5% per month on excess refunds, which is a new provision compared to the prior income tax law.
- Scope of Regular Assessment: The section clarifies that an assessment made for the first time under Section 279 will be treated as a regular assessment for the purpose of calculating interest on excess refunds.
Practical Implications:
- For Taxpayers: Taxpayers who receive refunds under Section 270(1) must ensure that the refund amount aligns with their actual tax liability. If an excess refund is granted, they will be liable to pay interest on the excess amount until the regular assessment is completed.
- For Tax Authorities: This section ensures that taxpayers are held accountable for excess refunds, discouraging overclaims and ensuring compliance with tax laws.
Critical Concepts:
- Regular Assessment: This refers to the final determination of a taxpayer's liability after considering all relevant factors, including deductions, exemptions, and income.
- Excess Refund: This occurs when the refund granted under Section 270(1) is higher than the amount determined to be refundable after a regular assessment.
- Interest Calculation: Interest is calculated at 0.5% per month (or part of a month) on the excess refund amount. For example, if the excess refund is ₹10,000 and the period from the refund date to the regular assessment date is 3 months, the interest payable would be ₹150 (₹10,000 × 0.5% × 3).
Compliance Steps:
- Monitor Refunds: Taxpayers should carefully review refunds received under Section 270(1) to ensure they align with their actual tax liability.
- Maintain Records: Keep detailed records of refunds received and assessments made to verify any discrepancies.
- Pay Interest Promptly: If an excess refund is identified, calculate and pay the interest due at 0.5% per month until the regular assessment date.
Examples:
- Scenario 1: A taxpayer receives a refund of ₹50,000 under Section 270(1). After a regular assessment, it is determined that only ₹40,000 should have been refunded. The excess refund is ₹10,000. If the period from the refund date to the regular assessment date is 4 months, the taxpayer must pay interest of ₹200 (₹10,000 × 0.5% × 4).
- Scenario 2: A taxpayer receives a refund of ₹30,000, but the regular assessment shows no refund is due. The entire ₹30,000 is considered an excess refund. If the period is 2 months, the interest payable is ₹300 (₹30,000 × 0.5% × 2).