Interest on refunds
[Section-437 as per the Income Tax Act, 2025 (this Act) w.e.f. 1st April, 2026.]
Section 437(1) of Income Tax Act 2025
437(1) 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 each month (or part of a month), in the circumstances specified in column B of the Table below, for the period specified in column C of the said Table.
TABLE
| Sl. No. | Circumstances | Period |
|---|---|---|
| A | B | C |
| 1 | Such refund is out of— (a) tax collected at source under section 394; or (b) paid by way of advance tax; or (c) treated as paid under section 390(5), during the year. | (a) From the first day of April following the tax year to the date the refund is granted, where the income-tax return has been furnished on or before the due date as specified in section 263(1); (b) from the date of furnishing the income-tax return to the date on which the refund is granted; in any other case |
| 2 | Where the refund is out of any tax paid under section 266. | 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. | from the date or, as the case may be, dates on 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. |
Section 437(2) of Income Tax Act 2025
437(2) No interest shall be payable under sub-section (1) (Table: Sl. No. 1 or 2), if the amount of refund is less than 10% of the tax as determined under section 270(1) or on regular assessment.
Section 437(3) of Income Tax Act 2025
437(3) 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 (Table: Sl. No. 11), such 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(4) of Income Tax Act 2025
437(4) In a case where a refund arises as a result of giving effect to an order under section 359 or 363 or 365(10) or 368 or 377 or 378, wholly or partly, otherwise than by making a fresh assessment or reassessment, the assessee shall be entitled to receive an additional interest which shall be––
- (a) over and above the interest payable under sub-section (1) or (3); and
- (b) computed on such amount of refund calculated at the rate of 3% per annum, for the period beginning from the date following the date of expiry of the time allowed under section 286(1) (Table: Sl. No. 10) to the date on which the refund is granted.
Section 437(5) of Income Tax Act 2025
437(5) For the purposes of sub-section (4)(b), in a case where proceedings for assessment or reassessment is pending, in computing the period for determining the additional interest payable, the period beginning from the date on which such refund is withheld by the Assessing Officer as per and subject to provisions of section 438(3) and ending with the date on which such assessment or reassessment is made, shall be excluded.
Section 437(6) of Income Tax Act 2025
437(6) Where refund of any amount becomes due to the deductor in respect of any amount paid to the credit of the Central Government under Chapter XIX-B, such deductor shall be entitled to receive, in addition to the said amount, simple interest thereon calculated at the rate of 0.5% for every month or part of a month comprised in the period, from the date on which—
- (a) claim for refund is made in the form as prescribed; or
- (b) tax is paid, where refund arises on account of giving effect to an order under section 359 or 363 or 365(10) or 368,
to the date on which the refund is granted.
Section 437(7) of Income Tax Act 2025
437(7) If the proceedings resulting in the refund are delayed for reasons attributable to the assessee or the deductor, whether wholly or in part, the period of the delay so attributable to him shall be excluded from the period for which interest is payable under this section.
Section 437(8) of Income Tax Act 2025
437(8) Where any question arises as to the period to be excluded under sub-section (7), it shall be decided by the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner whose decision thereon shall be final.
Section 437(9) of Income Tax Act 2025
437(9) Where, as a result of an order under section 270(10) or 271 or 279 or 287 or 288 or 359 or 363 or 365(10) or 368 or 377 or 378, the amount on which interest was payable under sub-section (1) has been increased or reduced, the interest shall be increased or reduced accordingly.
Section 437(10) of Income Tax Act 2025
437(10) In a case where the interest is reduced under sub-section (9), the Assessing Officer shall serve on the assessee a notice of demand in the form as prescribed specifying the amount of the excess interest paid and requiring him to pay such amount.
Section 437(11) of Income Tax Act 2025
437(11) The notice of demand under sub-section (10) shall be deemed to be a notice under section 289 and the provisions of this Act shall apply accordingly.
FAQs on Section 437 of Income Tax Act 2025
When is an assessee entitled to interest on a refund under the Income Tax Act, 2025?
An assessee is entitled to interest when a refund is due under the Act, subject to the provisions of Section 437. The interest is simple interest at the rate of 0.5% per month or part thereof.
What are the different scenarios under which interest on refund is payable?
Interest is payable in three primary scenarios:
- When the refund arises from tax collected at source, advance tax, or deemed payment under section 390(5).
- When the refund arises from tax paid under section 266.
- In any other case, when the amount paid exceeds the demand under section 289.
How is the period for interest computation determined for refunds from advance tax or TCS?
If the return is filed on or before the due date under section 263(1), interest is calculated from 1st April following the tax year to the date the refund is granted. Otherwise, interest is calculated from the date of filing the return to the date of refund.
Is there a threshold below which no interest on refund is payable?
Yes. If the refund amount is less than 10% of the tax determined under section 270(1) or upon regular assessment, no interest is payable under Sl. No. 1 or 2 of the Table in Section 437(1).
What happens if the refund results from an application under section 288?
In such cases, interest is calculated at 0.5% per month or part thereof from the date of application to the date the refund is granted.
Is additional interest payable if the refund arises from certain appellate or revision orders?
Yes. An additional interest at 3% per annum is payable if the refund arises as a result of an order under sections 359, 363, 365(10), 368, 377, or 378, without fresh assessment. This is over and above regular interest under sub-sections (1) or (3).
How is the period for additional interest calculated in such appellate cases?
The period is calculated from the day after the expiry of the time allowed under section 286(1) until the date the refund is granted.
Can any period be excluded from interest calculation?
Yes. If refund is withheld under section 438(3) during pending assessment or reassessment, that period is excluded from additional interest calculation under section 437(4)(b).
Is interest also payable on refunds due to a deductor under Chapter XIX-B?
Yes. Deductors are entitled to simple interest at 0.5% per month or part thereof from the date of refund claim or date of payment (where refund is due to an appellate order) to the date refund is granted.
What if the delay in refund is attributable to the assessee or deductor?
The period of delay attributable to the assessee or deductor is excluded from the interest calculation under Section 437.
Who decides if the delay is attributable to the assessee or deductor?
The Principal Chief Commissioner, Chief Commissioner, Principal Commissioner, or Commissioner decides the period to be excluded, and their decision is final.
Can the interest amount be modified later?
Yes. If the refund amount changes due to orders under specified sections like 270(10), 271, 279, etc., the interest amount will be increased or reduced accordingly.
What happens if excess interest was paid and later reduced?
The Assessing Officer will issue a notice of demand for the excess interest paid, and it will be treated as a notice under section 289 for recovery.
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