Interest on Income Tax Refund — Is It Exempt Under Any Section?

Getting a tax refund always feels good — like getting your own money back after a long wait.
But there’s one part that often confuses people: the interest you earn on your income tax refund. Is it tax-free? Or do you have to declare it?

Most taxpayers assume that because this interest comes from the government, it must be exempt. Unfortunately, that’s not true.
While the Income Tax Act provides for payment of interest on delayed refunds, it also treats that interest as taxable income.

Let’s understand exactly what section applies, how it’s calculated, & why it isn’t exempt under the Income Tax Act.

What Is an Income Tax Refund?

An income tax refund simply means you paid more tax than you actually owed. This extra payment might be due to excess TDS, advance tax, or an incorrect estimate of your income.

Once the Income Tax Department verifies your return, they refund the extra amount straight into your bank account.

But here’s the interesting part — if the refund takes longer than usual, the Income Tax Department provides for payment of interest on that delayed amount. And this interest, though small, has to be disclosed in your return.

Which Section Governs the Interest on Income Tax Refund?

The payment of interest on refunds is covered under Section 244A of the Income Tax Act, 1961.

This section says that if there’s a delay in issuing your refund, the government must pay interest from the Income Tax Department for the waiting period.
It ensures that taxpayers are compensated when the refund doesn’t arrive on time.

The interest is usually credited automatically along with the refund amount. You’ll see it mentioned in your Form 26AS or Annual Information Statement (AIS).

Also Read: Scrutiny and Assessment Notices

Rate and Duration of Interest Under Section 244A

As per Section 244A(1):

• Interest rate:5% per month (or 6% per year)"
• Period: From 1st April of the assessment year to the date your refund is issued

For example — if your refund for FY 2023–24 is processed in December 2024, interest will be calculated from April 1, 2024 till the actual refund date.

So yes, you earn interest from the Income Tax Department for that delay — but before celebrating, remember it’s not tax-free.

Is the Interest on Income Tax Refund Exempt Under Any Section?

Here comes the real question:

Is there any section that exempts interest on an income tax refund?

Sadly, no.

There’s no section under the Income Tax Act that exempts this interest.
The interest portion is fully taxable under the head “Income from Other Sources” according to Section 56(2)(viii).

In simple words —

• The refund amount (your own tax money) is not taxable.
• The interest you receive on it is taxable income.

You have to declare it in your ITR & pay tax as per your slab rate.

Why Is the Interest Taxable?

The logic is actually fair. The refund itself is your money — so it’s not income.
But the interest you earn is considered an extra benefit — a kind of compensation for the delay. And just like interest on your savings account or fixed deposit, it counts as income.

So even though the Income Tax Department provides for payment of interest, it expects you to pay tax on that interest. Fair game, right?

Section 56(2)(viii) — The Taxability Clause

To make things crystal clear, here’s what the law says:
Under Section 56(2)(viii),

“Any income by way of interest received on compensation, enhanced compensation, or on income tax refund shall be chargeable to tax under the head ‘Income from Other Sources.’”

This means there’s no escape clause — no exemption.
You must declare this income in the year you receive it (not when it’s calculated).

Also Read: Interest on Income Tax Refunds

Example to Understand Better

Let’s take a simple case.

Suppose Rohit filed his ITR for FY 2023–24.
The department processed it & issued a refund of ₹20,000 in December 2024, which included ₹19,400 as refund & ₹600 as interest on income tax refund.

Here’s how it’s treated:

• ₹19,400 → Refund of excess tax paid → Not taxable
• ₹600 → Interest paid under Section 244A → Taxable income"

Rohit will show ₹600 as Income from Other Sources in his next return.
If he’s in the 20% tax slab, he’ll pay ₹120 as tax on it.

It’s not much, but it must be disclosed to stay compliant.

Where to Check Interest Details

The easiest way to check how much interest you’ve received is through:

1. Form 26AS – Under the “Tax Refunds” section.
2. Annual Information Statement (AIS) – It clearly mentions “Interest from Income Tax Refund”.
3. Refund Order Email or Intimation under Section 143(1) – It lists both refund & interest separately.

Always double-check this before filing your return. The tax department already knows — and so should you.

Common Misunderstandings

Let’s clear up a few myths:

• ❌ “It’s government money, so it’s tax-free.” → False.
• ❌ “It’s already adjusted in the refund.” → Nope. You still need to report it.
• ❌ “It’s too small, I can skip it.” → Don’t. Even small mismatches can trigger automated notices.

Better to report ₹100 now than explain it to the tax officer later.

Interest on Refund for Businesses and Companies

For companies, the same rule applies.
Interest received on tax refunds is taxable as business income or other income, depending on the accounting treatment.

In audited financial statements, it’s shown as “Other Income” in the profit & loss account.
So whether you’re an individual or a business, the interest on refund is taxable — period.

Also Read: Tax on Gifts, Cash, and Property Received Without Consideration

What If Refund Is for Multiple Years?

Sometimes, a refund includes adjustments for older years. In such cases, the entire interest amount is taxable in the year you receive it, not split across earlier years.

That means if you receive ₹3,000 as total interest (covering multiple past years), you still declare it all in the year of receipt.

Judicial Stand

Even the courts have backed this tax treatment.
In the CIT vs. Gujarat Fluoro Chemicals (2013) case, the Supreme Court confirmed that the interest under Section 244A is fully taxable.

So legally, there’s zero ambiguity — you can’t claim any exemption on it.

How to Report It in ITR

Here’s how you declare it correctly:

1. Go to your ITR form → Schedule: Income from Other Sources
2. Enter the interest amount under “Interest from Income Tax Refund”
3. The total will automatically add to your gross income.
4. Pay tax according to your slab.

That’s it — simple, clean, compliant.

Quick Summary

Key Takeaways

• The Income Tax Act provides for payment of interest on delayed refunds under Section 244A.
• This interest from income tax refund is not exempt under any section.
• It must be declared under ‘Income from Other Sources’ as per Section 56(2)(viii).
• Always check your Form 26AS or AIS before filing your return.
• Even a small interest amount must be reported for accurate compliance.

Also Read: Tax on Gifts and Share Transactions

Conclusion

A tax refund is always welcome — it’s proof that you’ve paid more than necessary. But don’t forget, the interest you earn on that refund isn’t free money.

It’s part of your taxable income, just like savings interest or FD returns. So next time you receive a refund, remember to include the interest on income tax refund while filing your return. It keeps you fully compliant & avoids unnecessary tax notices later.Not sure how to report Interest from Income Tax Refund or find the exact figure from your AIS?
👉 Visit CallMyCA.com — our tax professionals can review your 26AS, calculate your refund interest under Section 244A, and help you file an error-free return that saves time, stress, & penalties.