After getting your income-tax refund, do you have to pay tax on the interest amount?

In the last few days, social media has been abuzz with claims of users getting their income-tax refunds after several months. Many users have also reported receiving interest on their income-tax refunds.

While the Income-tax Department has not officially released any statement regarding the issuance of long-pending refunds, taxpayers, including tax experts, have confirmed getting both refunds and interest from the tax department.

However, after getting the refunds, one question on many taxpayers' minds is whether the interest will be taxed. And if so, when?

The answer is yes. The interest on an income-tax refund is taxable under the head "income from other sources". If you have received an interest on your refund for FY 2024-25, it must be added to your total taxable income for FY 2025-26 and taxed as per your applicable slab rate.

How is interest paid?

Interest is not payable on refunds all the time. Here are some important rules you should know about the interest on income-tax refund.

• Interest is not payable for the portion of the delay that is attributable to the taxpayer.

• Interest is calculated at 6% per year (0.5% per month)

• If the return is filed after the due date, the interest is counted from the day of actual filing.

• Interest is not payable if the refund is less than 10% of the total tax payable.

What are the relevant sections under the Income-tax Act, 2025?

Section 437 (1) of the Income-tax Act 2025 mandates the interest on refunds. It says, "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 every month or part of a month..."

But the interest on refund is subject to several conditions as mentioned above in the article.

The taxation of interest as income from other sources is mandated under Section 92 of the Income-tax Act 2025 as follows:

Section 92(1) says, " Income of every kind which is not to be excluded from the total income under this Act, shall be chargeable to income-tax under the head “Income from other sources”, if it is not chargeable to income-tax under any of the heads."

Section 92 (2) (i) mandates taxation of "any income by way of interest received on compensation."