Income tax refund is the amount of excess tax paid by a taxpayer during a financial year (FY). The term ‘excess tax’ indicates that the amount of tax paid by the income tax assessee in a given FY is greater than his/her tax liability for the same year. In such a case, the income tax department returns this excess tax, which is called income tax refund. This may happen when TDS, self-assessment tax or advance tax paid by a taxpayer is higher than his/her tax liability.
What is the process to claim Income Tax Refund?
A taxpayer can claim income tax refund under Section 237 of Income Tax Act, 1961-2019. Earlier, Form 30 was needed to claim a tax refund. However, Form 30 is no longer required with the introduction of e-transfer of refunds.
Income tax refund can now be simply claimed by filing your ITR and verifying the same, either physically or electronically within 120 days of filing ITR. However, you must ensure that the excess tax payment being claimed as refund by you is reflected in Form 26AS. Once the ITR is processed, you will receive one of the following 3 messages:
- Your tax calculation matches with that of the IT department and no further tax is payable by you.
- Your tax calculation does not match with that of the IT department and an additional tax has to be paid (tax demand).
- Your tax calculation matches with that of the tax department and claim for tax refund is accepted.
In the third case, the excess tax paid for the financial year is credited directly to your bank account as per details provided by you at the time of filing ITR. The refund is usually completed within 3 to 6 months of ITR filing.
How is the amount of Income Tax Refund calculated?
Tax refund is simply the difference between the tax paid by a taxpayer/TDS deducted for a particular FY and the actual tax liability of the assessee for that FY. Further, it is automatically calculated, once you fill and validate the relevant ITR form online.
Please note that the refund amount as per your ITR filing may not be accepted and refunded by the IT department. The amount of tax refund, if any, depends on the verification done by the assessing officer from the income tax department.
Interest on Income Tax Refund
An interest may be paid by income tax department on the refund amount, if the amount of refund is 10% or more of the total tax paid. The interest rate in such cases is 0.5% per month or part of the month calculated on the amount of tax refund. The interest is calculated from 1st April of the applicable assessment year till the date of refund, only if excess advance tax is paid or TDS has been deducted in excess.
Income Tax Demand v/s Income Tax Refund
At the time of ITR filing you might find that an income tax demand is applicable in your case instead of a refund. The following are the key differences between tax demand and tax refund:
| Income Tax Refund | Income Tax Demand | |
| What is it? | Amount returned to a taxpayer, once the assessment process is completed. | Additional amount to be paid by a taxpayer at the time of e-filing ITR. |
| When does it apply? | When the amount of tax paid in a particular FY is greater than the tax liability for that FY. | When the amount of tax paid in a FY is less than the tax liability for that particular FY. |
| Time period | Usually, refund is credited within 3 to 6 months of ITR filing | The tax demand should be paid at the time of ITR filing. Otherwise it is payable within 30 days of receiving an IT Department notice. |
| Steps to be taken | A separate procedure is not required. ITR filing and verification are enough to claim a tax refund, if any. | Payable using Challan 280 on the TIN website of Income Tax Department. In case of IT notice for tax demand, you can log into the Income Tax e-filing website and select the appropriate link for due tax payment. |