Interest on Excess Refund of Income Tax under Section 234D

• Taxation
• ||
• November 11, 2021

After section 234C of the Income-tax Act, section 234D “Interest on excess refund” was placed with effect from the 1^st day of June 2003. This document describes interest under section 234D of the Income Tax Act of 1961 on excess refunds granted to taxpayers. It includes calculating interest under Section 234D, provisions related to refund, amount liable for claim and adjustment under Section 234D(2). Sometimes taxpayers get excess refunds. Section 234D provides for interest liens granted to taxpayers for excess refunds.

How is interest calculated under the Income-Tax Act, 1961?
Before understanding the provisions of Section 234D, it is essential to understand the requirements of Rule 119A, which specify how interest is calculated under the Income Tax Act. Subject to rule 119A, when calculating the interest payable by the taxpayer or the interest payable by the central government to the taxpayer in accordance with any provision of the Act:

• If interest is calculated on an annual basis, the period for which interest is calculated is rounded to one month or several months. For this reason, part of the month is ignored, and the rounded period is considered the period for which interest is calculated.
• If interest is calculated for each month or a part of the month included in the period, any fraction is considered a full month and interest are calculated.
• The amount of taxes, fines/penalty or other total amounts for which such interest is calculated is rounded to the nearest multiple of 100 rupees. For this reason, any fraction of the 100 rupees is ignored, and the rounded amount is considered the amount for which interest is calculated.

Provisions related to refund
If a taxpayer has overpaid the tax, they will claim that tax on his income tax return and the excess tax will be refunded. A taxpayer has often been granted a refund according to intimation issued under section 143(1); however, the refund is reduced on regular assessment, or no refund may be determined. In this case, the Income-tax Department will recover the excess refund from the taxpayer with interest under Section 234D.

Under section 234D, interest is charged if refunds are issued to taxpayers under section 143 (1) and:

• No refund is due on regular assessment; or
• Under section 143(1), the refunded amount exceeds the refund assessed in the regular assessment. Regular assessment usually refers to the assessment conducted in accordance with section 143(3), i.e. scrutiny assessment, or the assessment conducted in accordance with section 144, that is, best judgement assessment. The assessment conducted under section 147 or section 153A will also be regarded as a regular assessment.

Interest rate
The interest rate mentioned in section 234D is calculated as ½% per month or part of the month. Interest is collected from the date of granting a refund under section 143(1) until the date of the regular assessment. Regular assessment means an assessment based on Section 143 (3) or Section 144. Assessments first held under Section 147 or Section 153A are also considered regular assessments.

Amount liable for interest
Interest pursuant to section 234D is charged on a full or excess amount of refund (Depending on the circumstances). 

Adjustment under section 234D (2)
Suppose the refund granted under Section 143 (1) is correctly granted for an order placed under any of the sections below. In that case, the interest charged under section 234D will be adjusted according to the order: 

At AJSH, we assist our clients in dealing with various income tax compliances, including income tax assessments, TDS returns, ITR filings, tax advisory and other related services by providing them adequate support and guidance from our end. If you have any questions or wish to know more about interest on excess refund of income tax under section 234D, kindly contact us.