Tax Alert: Interest on Income Tax Refund Is Taxable — Sections 437 & 92 Explained
1. What Is Interest on Income Tax Refund? (Section 437)Under Section 437 of the new Income‑tax Act, 2025, a taxpayer is entitled to receive simple interest from the tax department if their income‑tax refund is delayed beyond prescribed timelines. The basic rule is:
Interest is a compensation for the delay in returning your money — similar to how a bank pays interest if it delays crediting your fixed deposit redemption.2. Key Rules Under Section 437Section 437 lays out detailed rules on how and when this interest is computed:📌 (a) Payable Interest Rate and Period
If a refund is due, the assessee gets interest (@ 0.5 % per month or part of a month) from the start date (depending on when the return was filed) until the refund is paid.📌 (b) Minimum Threshold for Interest
No interest is payable if the refund amount is less than 10 % of the tax liability for that year.📌 (c) Exclusion of Delay Caused by Taxpayer
If the refund was delayed due to taxpayer/account holder reasons (e.g., late filing, incomplete documents), that portion of delay is excluded from interest calculation.📌 (d) Additional Rules
In some cases (e.g., refunds after appellate orders), additional interest at a different rate may apply.➤ Section 437 is not the tax rule on whether the interest itself is taxable — it governs eligibility and computation of interest on refunds.3. Why Is This Interest Taxable? (Section 92 & Head of Income)Once you receive refund interest from the Income‑tax Department, under Section 92 of the same Act, it must be included in your taxable income in the year of receipt as:“Income from Other Sources”
— a residual head used for incomes not chargeable under the other main categories like salary, house property, business, or capital gains.This means:✔ You add the interest amount received to your total taxable income in the year it was credited to you.
✔ It is taxed at your normal slab rate.
✔ The refund of tax itself is not taxable, because it simply returns an excess tax you already paid.Summary: What Every Taxpayer Must KnowPointKey TakeawayInterest entitlementTax rules allow interest on delayed refunds under Section 437.Interest rateSimple interest of 0.5 % per month until refund payment.Minimum thresholdNo interest if refund < 10 % of tax liability.Interest taxabilityInterest on refund is taxable under “Income from Other Sources” per Section 92.Year of reportingInclude the interest in the AY/financial year when received.ExampleIf you receive a refund of ₹30,000 along with ₹1,800 as interest in FY 2026‑27, you must report the ₹1,800 as income under ‘Income from Other Sources’ in your ITR for that year. The ₹30,000 refund itself is not taxable because it simply returns excess tax you paid earlier. Disclaimer:The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of any agency, organization, employer, or company. All information provided is for general informational purposes only. While every effort has been made to ensure accuracy, we make no representations or warranties of any kind, express or implied, about the completeness, reliability, or suitability of the information contained herein. Readers are advised to verify facts and seek professional advice where necessary. Any reliance placed on such information is strictly at the reader’s own risk.
- If you’ve paid excess tax in a year, you can claim a refund.
- If that refund is delayed, the department must pay interest at 0.5 % per month (6 % per year) in addition to the refund amount, subject to certain conditions.
Interest is a compensation for the delay in returning your money — similar to how a bank pays interest if it delays crediting your fixed deposit redemption.2. Key Rules Under Section 437Section 437 lays out detailed rules on how and when this interest is computed:📌 (a) Payable Interest Rate and Period
If a refund is due, the assessee gets interest (@ 0.5 % per month or part of a month) from the start date (depending on when the return was filed) until the refund is paid.📌 (b) Minimum Threshold for Interest
No interest is payable if the refund amount is less than 10 % of the tax liability for that year.📌 (c) Exclusion of Delay Caused by Taxpayer
If the refund was delayed due to taxpayer/account holder reasons (e.g., late filing, incomplete documents), that portion of delay is excluded from interest calculation.📌 (d) Additional Rules
In some cases (e.g., refunds after appellate orders), additional interest at a different rate may apply.➤ Section 437 is not the tax rule on whether the interest itself is taxable — it governs eligibility and computation of interest on refunds.3. Why Is This Interest Taxable? (Section 92 & Head of Income)Once you receive refund interest from the Income‑tax Department, under Section 92 of the same Act, it must be included in your taxable income in the year of receipt as:“Income from Other Sources”
— a residual head used for incomes not chargeable under the other main categories like salary, house property, business, or capital gains.This means:✔ You add the interest amount received to your total taxable income in the year it was credited to you.
✔ It is taxed at your normal slab rate.
✔ The refund of tax itself is not taxable, because it simply returns an excess tax you already paid.Summary: What Every Taxpayer Must KnowPointKey TakeawayInterest entitlementTax rules allow interest on delayed refunds under Section 437.Interest rateSimple interest of 0.5 % per month until refund payment.Minimum thresholdNo interest if refund < 10 % of tax liability.Interest taxabilityInterest on refund is taxable under “Income from Other Sources” per Section 92.Year of reportingInclude the interest in the AY/financial year when received.ExampleIf you receive a refund of ₹30,000 along with ₹1,800 as interest in FY 2026‑27, you must report the ₹1,800 as income under ‘Income from Other Sources’ in your ITR for that year. The ₹30,000 refund itself is not taxable because it simply returns excess tax you paid earlier. Disclaimer:The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of any agency, organization, employer, or company. All information provided is for general informational purposes only. While every effort has been made to ensure accuracy, we make no representations or warranties of any kind, express or implied, about the completeness, reliability, or suitability of the information contained herein. Readers are advised to verify facts and seek professional advice where necessary. Any reliance placed on such information is strictly at the reader’s own risk.