Refund Mechanism and Interest on Refunds under New Act
Refund of excess tax paid is not a concession by the tax department. It is a statutory right of the taxpayer. Under the New Income-tax Act, the refund mechanism has been streamlined through automation, while provisions relating to interest on delayed refunds continue to protect taxpayers against undue retention of funds by the government.
Understanding how refunds are processed and when interest becomes payable is critical for effective tax compliance.
When Does a Tax Refund Arise
A refund arises when:
Advance tax or self-assessment tax paid exceeds actual tax liability
TDS or TCS deducted is higher than tax payable
Excess tax is paid due to incorrect assessment
Demand is reduced or deleted in appeal
Rectification results in lower tax liability
Refund entitlement flows automatically once excess payment is established.
Refund Processing under the New Act
Under the new framework, refunds are:
Processed electronically
Issued directly to the taxpayer’s validated bank account
Linked with PAN, Aadhaar, AIS, and return data
Before issuing refund, the system may:
Adjust outstanding demands
Verify data consistency
Seek clarification in case of mismatch
Automation has reduced discretion, but accuracy of return filing remains crucial.
Adjustment of Refund against Outstanding Demand
The tax department is empowered to:
Adjust refunds against existing tax demands
However, such adjustment:
Must be communicated to the taxpayer
Should be based on valid and subsisting demand
Can be challenged if demand is disputed or incorrect
Refund adjustment without opportunity can be legally contested.
Interest on Refund: Taxpayer Protection
Interest on refund is payable when refund is delayed beyond the prescribed time.
Interest compensates the taxpayer for:
Use of their money by the government
Administrative delay
Prolonged processing or litigation
Known principle:
Interest follows refund. It is not discretionary.
Situations Where Interest Is Payable
Interest on refund generally arises when:
Refund is delayed after processing of return
Refund arises due to appellate orders
Refund follows rectification or reassessment
Refund is withheld and later released
Interest continues till the date refund is actually granted.
Situations Where Interest May Be Denied
Interest may not be payable where:
Delay is attributable to the taxpayer
Return itself is defective or invalid
Refund arises from voluntary updated return
Incorrect bank details cause delay
Compliance discipline directly impacts refund outcomes.
Refund Withholding under the New Act
Refund may be withheld in limited situations, such as:
Pending scrutiny or assessment
High-risk mismatch indicators
Ongoing verification proceedings
However, withholding must be:
Backed by legal authority
Communicated with reasons
Released once conditions are satisfied
Arbitrary withholding is not sustainable in law.
Taxpayer Remedies in Case of Refund Delay
If refund is delayed, taxpayers may:
File online grievance
Seek rectification
Approach higher authorities
Claim interest statutorily
Seek judicial remedy in extreme cases
Delayed refund is not merely inconvenience; it is a legal lapse.
Conclusion
Under the New Income-tax Act, the refund mechanism is faster, automated, and transparent. At the same time, interest on refunds remains a critical safeguard ensuring fairness between the taxpayer and the State.
Taxpayers who file accurate returns and maintain data consistency are best positioned to receive timely refunds with applicable interest.
Refund is your right.
Interest is your protection.
Written by:
Abhishek Gupta
Chartered Accountant
Office No. 19, Sagar Building, 4th Floor, Plot-327,
Narshi Natha Street, Masjid Bunder (West),
Mumbai – 400009
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