Budget 2026: Interest on income tax refund at par with interest on tax dues on experts' wishlist

Here are three big changes expected by experts from Union Budget 2026 on February 1, 2026:

Parity in tax refund and tax demand

According to experts at the Federation of Indian Petroleum Industry (FIPI), the interest on refunds paid to an assessee should be at par with interest charged by the tax department on short payment of Income tax. They pointed out three tax laws behind the disparity:

• Under section 244A of the Income Tax Act 1961, the rate of interest applicable on refunds due to an assessee is 0.5% per month or part thereof

• Under the provisions of sections 234A, 234B and 234C, the rate of interest chargeable from the assessees is 1% per month or part thereof.

• Interest on refunds is subject to tax in the hands of the assessee, whereas no deduction is admissible for interest paid by an assessee.

"It is, therefore, submitted that the interest rate on the refunds due to the assessee and on the amounts payable by the assessee to the Government should be same on the ground of equity," FIPI experts. said.

Clarity on refund amount

According to the experts, the amount on which interest applies in refund cases is not very clear.

Currently, section 244A of the Income Tax Act, 1961 deals with interest payable on refunds due to an assessee. Subsection (1) of section 244A starts with the phrase "Where refund of any amount becomes due to the assessee.....".

"On a literal construction of the aforesaid, it may be inferred that the phrase '..any amount...' occurring in section 244A(1) refers to the total amount of refund due to an assessee not just the tax component thereof. Thus, the interest should be calculated on the amount of tax, interest, penalty etc., comprising the total amount of refund," FIPI experts said in their Pre-Budget Memorandum for Union Budget 2026-27

"Absence of ample clarity as to whether the interest u/s. 244A is payable only on the amount of tax refund OR interest, penalty and other components of refund would also be covered within the ambit thereof leads to avoidable litigation. It is, therefore, suggested that a suitable clarificatory provision may be inserted in section 244A of the Act in this regard," they added.

End set off of refunds against erroneous demand, 12% interest

At present, the adjustment of refunds due to assessee against erroneous demands shown outstanding in their cases causes great heartburn.

"Even where the assessee lodges his objection on the CPС portal, pointing out that the demand sought to be adjusted against the refund was not outstanding and therefore is being erroneously adjusted, there is no remedy by which the CРС can take note of the same," experts said.

The above happens even as it is settled by several judicial pronouncements that "where any demand outstanding against the assessee relates to a point which stands squarely covered by a decision in the assessee favour, such demand cannot be adjusted against any refund due to the assessee."

"Courts have logically explained in this regard that the assessee in such a case would have been undisputedly entitled to stay on recovery of such demand, and merely because the department is in possession of the assessee funds due to him as legitimate refund, it cannot be adjusted against such a demand," they said.

FIPI experts have suggested amending the rules to provide that no set-off of refund can be made by any income-tax authority

• Without giving intimation in writing to such person of the action proposed to be taken, and

• Without dealing with the objections, if any, filed by such person in response to such intimation served on him.

"Systems should be amended/put in place to stop assessee funds being adjusted without authority of law. It is further suggested that proper guidelines be laid to introduce accountability and further avoid overlapping of responsibility between TRACES/CPC officers vis-à-vis the jurisdictional officers in such cases. It is further suggested that refund struck with the department due to adjustment against erroneous demand, non-grant of due TDS credit etc. be made eligible for interest @ 12% per annum," they suggested.