Income tax refund rules under the Income Tax Act 2025 explained: Is interest on delay allowed?

The Income Tax Act, 2025 will come into effect on April 1, 2026, replacing the Income Tax Act, 1961. While the new law does not introduce changes that directly impact taxpayers, its implementation is expected to make tax provisions easier to understand and comply with.

In this article, we take a look at key sections of the Income Tax Act 2025 that cover provisions related to income tax refunds, what they say about interest or delayed refunds, the calculation period, and more.

Sections covering tax refunds

The provisions related to income tax refunds are mentioned under sections 431 to 438 of the Income Tax Act, 2025. Under the Income Tax Act, 1961, these provisions were under sections 237 to 245.

When can a taxpayer get an income tax refund

As per Section 433 of Income Tax Act 2025, every claim for refund shall be made by furnishing of income tax return.

Section 431 of the new law says that a refund is eligible when the total tax paid by an assessee is more than his/her liability for the tax year.

"If any person satisfies the Assessing Officer that the amount of tax paid by him or on his behalf or treated as paid by him or on his behalf for any tax year exceeds the amount with which he is properly chargeable under this Act for that year, he shall be entitled to a refund of the excess."

Special refund cases

Apart from the above, Section 432 of the Income Tax Act 2025 provides for refunds in the following special cases:

• Section 432 (1): If the income of a person is included in the total income of any other person, then only the latter is eligible for refund.

"Where the income of one person is included in total income of any other person under any provision of this Act, the latter alone shall be eligible for a refund under this Chapter in respect of such income," the new law says.

• Section 432 (2): In case a person is unable to claim a refund due to date, incapacity other cases, his/her legal representative, trustee, or guardian will get a refund.

"Where a person is unable to claim or receive a refund due to him, on account of death, incapacity, insolvency, liquidation or other cause, his legal representative or the trustee or guardian or receiver, shall be entitled to claim or receive such refund for the benefit of such person or his estate."

Is interest on refund payable?

Yes. As per section 437 (1), an interest of 0.5% for every month is allowed. The law 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...".

The calculation of the period for computing interest on refund will be as follows:

1. When the refund is out of TCS under section 394 or paid by way of advance tax or treated as paid under section 390(5), during the financial year.

In this case, interest will be calculated from ,

• a)the first day of April of the year following the tax year to the date on which the refund is granted, where the return of income has been furnished on or before the due date as specified in section 263(1);

• b)from the date of filing ITR to the date on which refund is granted; in any other case.

2. Where the refund is out of any tax paid under section 266

In this case, the interest period will be calculated from the date of furnishing of return of income or payment of tax, whichever is later, to the date on which the refund is granted.

3. Any other case

The interest on refund period will be calculated "From the date or, as the case may be, dates on and from which the amount of tax or penalty specified in the notice of demand issued under section 289 is paid in excess of such demand to the date on which the refund is granted."

Other key rules related to refunds

• As per Section 437 (2), interest on refund will not be payable if the amount of refund is less than 10% of the tax liability (Section 437 (2))

• As per Section 437 (3), a 0.5% interest per month is allowed when the refund arises due to an order of the assessing officer in response to an application by the assessee under Section 288 (1).

"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 (1) (Table: Sl. No. 11), 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," Section 437 (3) says.