Income Tax 2025

Appearance

Interest on refunds. ​

437(1) ​

Where a refund is due to the assessee under this Act, he shall, subject to the provisions of this section, be entitled to receive, in addition to the refund, simple interest thereon calculated at the rate of 0.5% for each month (or part of a month), in the circumstances specified in column B of the Table below, for the period specified in column C of the said Table. --Table--

437(2) ​

No interest shall be payable under sub-section (1) (Table: Sl. No. 1 or 2), if the amount of refund is less than 10% of the tax as determined under section 270(1) or on regular assessment.

437(3) ​

Where refund, mentioned in sub-section (1) (Table: Sl. No. 1), arises as a result of an order passed by the Assessing Officer in consequence of an application made by the assessee under section 288 (Table: Sl. No. 11), such interest shall be calculated at the rate of 0.5% for every month or part of a month comprised in the period from the date of such application to the date on which the refund is granted

437(4) ​

In a case where a refund arises as a result of giving effect to an order under section 359 or 363 or 365(10) or 368 or 377 or 378, wholly or partly, otherwise than by making a fresh assessment or reassessment, the assessee shall be entitled to receive an additional interest which shall be––

  • (a) over and above the interest payable under sub-section (1) or (3); and
  • (b) computed on such amount of refund calculated at the rate of 3% per annum, for the period beginning from the date following the date of expiry of the time allowed under section 286(1) (Table: Sl. No. 10) to the date on which the refund is granted.

437(5) ​

For the purposes of sub-section (4)(b), in a case where proceedings for assessment or reassessment is pending, in computing the period for determining the additional interest payable, the period beginning from the date on which such refund is withheld by the Assessing Officer as per and subject to provisions of section 438(3) and ending with the date on which such assessment or reassessment is made, shall be excluded.

437(6) ​

Where refund of any amount becomes due to the deductor in respect of any amount paid to the credit of the Central Government under Chapter XIX-B, such deductor shall be entitled to receive, in addition to the said amount, simple interest thereon calculated at the rate of 0.5% for every month or part of a month comprised in the period, from the date on which—

  • (a) claim for refund is made in the form as prescribed; or
  • (b) tax is paid, where refund arises on account of giving effect to an order under section 359 or 363 or 365(10) or 368, to the date on which the refund is granted.

437(7) ​

If the proceedings resulting in the refund are delayed for reasons attributable to the assessee or the deductor, whether wholly or in part, the period of the delay so attributable to him shall be excluded from the period for which interest is payable under this section.

437(8) ​

Where any question arises as to the period to be excluded under sub-section (7), it shall be decided by the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner whose decision thereon shall be final.

437(9) ​

Where, as a result of an order under section 270(10) or 271 or 279 or 287 or 288 or 359 or 363 or 365(10) or 368 or 377 or 378, the amount on which interest was payable under sub-section (1) has been increased or reduced, the interest shall be increased or reduced accordingly.

437(10) ​

In a case where the interest is reduced under sub-section (9), the Assessing Officer shall serve on the assessee a notice of demand in the form as prescribed specifying the amount of the excess interest paid and requiring him to pay such amount.

437(11) ​

The notice of demand under sub-section (10) shall be deemed to be a notice under section 289 and the provisions of this Act shall apply accordingly.

Explanation

Section Summary: ​

Section 437 of the Income Tax Act governs the payment of interest on tax refunds due to taxpayers. It specifies the circumstances under which interest is payable, the applicable rates, and the periods for which interest is calculated. The section ensures that taxpayers are compensated for delays in receiving refunds, while also outlining exceptions and additional interest provisions in specific scenarios.

Key Changes: ​

  1. Interest Rate: The interest rate on refunds is set at 0.5% per month (or part of a month) in most cases, with an additional 3% per annum in certain situations (e.g., refunds arising from specific orders under sections like 359, 363, etc.).
  2. Minimum Refund Threshold: No interest is payable if the refund amount is less than 10% of the tax determined under section 270(1) or regular assessment.
  3. Additional Interest: Introduces an additional interest of 3% per annum for refunds arising from specific orders, calculated from the expiry of the time allowed under section 286(1) until the refund is granted.
  4. Exclusion of Delay Periods: Interest is not payable for periods where delays are attributable to the taxpayer or deductor.
  5. Refund to Deductors: Extends interest provisions to deductors (e.g., employers or entities deducting TDS) for refunds due under Chapter XIX-B.

Practical Implications: ​

  1. For Taxpayers:

    • Taxpayers are entitled to interest on refunds if the refund is delayed beyond the prescribed timelines.
    • Interest is not payable if the refund amount is small (less than 10% of the tax determined).
    • Delays caused by the taxpayer (e.g., incomplete documentation) will exclude the corresponding period from interest calculation.

  2. For Businesses and Deductors:

    • Deductors (e.g., employers or entities deducting TDS) are now explicitly covered under the interest provisions for refunds.
    • Businesses must ensure timely compliance to avoid delays that could reduce or eliminate interest on refunds.

  3. For the Tax Department:

    • The tax department must process refunds promptly to avoid paying additional interest.
    • Specific orders (e.g., under sections 359, 363, etc.) trigger higher interest obligations, incentivizing timely resolution.

Critical Concepts: ​

  1. Simple Interest: Interest calculated only on the principal amount, without compounding.
  2. Refund Due: The amount overpaid by the taxpayer or deductor, which the government is obligated to return.
  3. Exclusion of Delay Periods: If the taxpayer or deductor causes delays (e.g., by not providing required documents), the corresponding period is excluded from interest calculation.
  4. Additional Interest: An extra 3% per annum is payable in specific cases, such as refunds arising from orders under sections 359, 363, etc.

Compliance Steps: ​

  1. For Taxpayers:

    • Ensure accurate and timely filing of tax returns to avoid delays in refund processing.
    • Provide all necessary documentation promptly if the tax department requests additional information.
    • Monitor refund status and follow up if delays occur.

  2. For Deductors:

    • File TDS returns accurately and on time to avoid delays in refund processing.
    • Submit refund claims in the prescribed form if excess TDS has been paid.

  3. For the Tax Department:

    • Process refunds within the timelines specified under the Act.
    • Notify taxpayers of any delays attributable to them and exclude such periods from interest calculation.

Examples: ​

  1. Scenario 1: A taxpayer files their return and is due a refund of ₹50,000. The refund is processed 6 months after the due date. The taxpayer is entitled to interest at 0.5% per month for 6 months, totaling ₹1,500.

  2. Scenario 2: A deductor (employer) pays excess TDS and claims a refund. The refund is processed 4 months after the claim is made. The deductor is entitled to interest at 0.5% per month for 4 months on the refund amount.

  3. Scenario 3: A taxpayer’s refund arises from an order under section 359. The refund is delayed by 1 year beyond the prescribed timeline. The taxpayer is entitled to:

    • Regular interest at 0.5% per month.
    • Additional interest at 3% per annum for the 1-year delay.

  4. Scenario 4: A taxpayer’s refund is delayed because they failed to submit required documents for 2 months. These 2 months are excluded from the interest calculation period.

This section ensures fairness in compensating taxpayers for delays in refunds while balancing the tax department’s obligations and incentivizing timely compliance.