The Income Tax Act, 1961, governs the framework for taxation in India, including the provisions related to payment, assessment, and refund of taxes. Taxpayers often find themselves in a position where they have paid more tax than their actual liability. In such cases, the Act provides for a statutory mechanism for claiming a refund of the excess amount. The objective is to prevent unjust enrichment of the State at the cost of the taxpayer.
Concept of Refund in Income Tax
Refunds arise when the tax paid by a taxpayer exceeds their total tax liability for the relevant financial year. This excess could result from:
- Excess deduction of tax at source (TDS)
- Higher advance tax payment
- Mistaken payment under incorrect head
- Excess self-assessment tax
- Relief granted on appeal or rectification
Section 237 of the Income Tax Act, 1961, is the primary provision that enables a person to claim a refund when they believe they have paid more tax than required.
Legal Provisions Governing Refunds
1. Section 237 – Refunds
Section 237 provides that if a person satisfies the Assessing Officer (AO) that the amount of tax paid by them or on their behalf exceeds the amount of tax chargeable, they are entitled to a refund.
“If any person satisfies the Assessing Officer that the amount of tax paid by him or on his behalf for any assessment 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.”
2. Section 238 – Person Entitled to Claim Refund
It specifies that the refund may be claimed by the person who has borne the tax or on whose behalf the tax has been paid. As per the Income Tax Act, if the income of one person is included in the total income of another person under any provision of the Act, only the latter (the person in whose income it is included) is entitled to claim a refund related to that income.
Similarly, if fringe benefits provided by one employer are considered as provided by another employer under Chapter XII-H, only that employer can claim the refund. In cases where a person is unable to claim a refund due to death, incapacity, insolvency, or liquidation, their legal representative, trustee, guardian, or receiver can claim the refund on their behalf for the benefit of the individual or their estate.
3. Section 239 – Procedure for Claiming Refund under the Income Tax Act, 1961
To claim a refund of excess tax paid under the Income Tax Act, 1961, the following procedure must be followed as per the prescribed rules:
Filing of Claim:
A refund claim must be made using the prescribed form and should be verified in the prescribed manner, typically through the filing of a valid income tax return (ITR) under Section 139 of the Act.
Time Limit for Claim:
For assessment years starting on or before April 1, 1967: The claim must be made within four years from the end of the relevant assessment year.
For assessment year starting on April 1, 1968: The claim must be made within three years from the end of the assessment year.
For other assessment years (after 1968): The claim must be made within one year from the end of the relevant assessment year.
For fringe benefits assessable from April 1, 2006 onwards: The claim must also be filed within one year from the end of the assessment year.
Verification and Processing:
Once filed, the refund claim is processed by the Income Tax Department. If accepted, the refund is issued along with interest under Section 244A, where applicable.
Mode of Refund:
Refunds are generally credited electronically to the bank account mentioned in the ITR. It is essential that the bank account is pre-validated and linked with the PAN.
Tracking Refund:
Taxpayers can track the status of their refund through the Income Tax e-filing portal or the NSDL-TIN website using their PAN and assessment year.
4. Section 240 – Refund on Appeal, etc.
If a refund becomes due after an appeal or other proceeding, the Assessing Officer must issue it automatically. However, if a fresh assessment is directed, the refund is given only after it’s completed; and if the assessment is annulled, the refund is limited to the excess tax over the returned income.
5. Section 241A – Withholding of Refund in Certain Cases
Inserted by the Finance Act, 2017, this provision empowers the Assessing Officer to withhold a refund due under Section 143(1) if a scrutiny notice has been issued under Section 143(2) for the same assessment year (starting on or after April 1, 2017), and the officer believes that granting the refund may adversely affect revenue.
However, such withholding can be done only after recording the reasons in writing and obtaining prior approval from the Principal Commissioner or Commissioner, and the refund can be withheld only until the completion of the final assessment.
6. Section 242 – No Challenge to Final Assessment in Refund Claims
In a refund claim, the assessee cannot question the correctness of a final assessment or seek its review; only excess or wrongly paid tax can be refunded.
Note: Sections 233 and 234, which dealt with interest on delayed refunds, are not applicable to assessment years beginning on or after April 1, 1989.
CBDT Guidelines on Delayed Refund Claims:
For refund claims involving such years, taxpayers must instead rely on condonation provisions under Section 119(2)(b) of the Income-tax Act. As per CBDT Circular No. 9/2015, dated June 9, 2015, delay in filing refund claims or carry-forward of losses may be condoned if genuine hardship is established and subject to specified monetary limits.
However, no condonation is allowed beyond six years from the end of the relevant assessment year, except in cases where a court order affects the timeline.
Mode of Filing Refund Claim
Refund claims are usually embedded in the filing of the Income Tax Return (ITR). The Centralized Processing Centre (CPC) of the Income Tax Department processes these returns and calculates the refund.
Electronic Mode:
- Refunds are processed electronically via the TIN-NSDL portal.
- Bank account validation and pre-verification are mandatory.
- Aadhaar-PAN linking and e-verification expedite refund processing.
Interest on Refund – Section 244A
One of the critical rights associated with refund is the interest payable by the Department on delayed refunds. Section 244A governs this:
1. Eligibility for Interest
Interest is payable when the refund arises from:
- Excess advance tax
- TDS
- Self-assessment tax
2. Rate of Interest
The rate of interest is 0.5% per month or part of the month on the excess amount.
3. Period of Interest
For refunds due to TDS or advance tax: From April 1 of the assessment year to the date refund is granted.
For self-assessment tax: From the date of filing the return or payment of tax (whichever is later) till the date of refund.
Illustration: If an assessee pays ₹1,00,000 excess and refund is issued after 10 months, interest payable would be ₹5,000.
4. No Interest for Delay Caused by Assessee
If the delay is attributable to the assessee (e.g., failure to file return in time), interest shall be reduced or denied.
Refund Adjustment Against Outstanding Demand – Section 245
Section 245 empowers the tax authorities to adjust refunds against any outstanding demand after giving an opportunity of being heard to the assessee.
Key conditions:
- Prior intimation must be given.
- Order of set-off should be passed.
Time Limit for Claiming Refund
As per Section 239 and Rule 41 of the Income Tax Rules, the time limit for filing a refund claim is within one year from the end of the assessment year. For delayed claims, a condonation request can be made under Section 119(2)(b) to the CBDT in genuine hardship cases.
Delayed or Non-Receipt of Refund: Remedies
Grievance Redressal:
- Use CPGRAMS or Income Tax e-filing portal grievance module.
Rectification:
- File a rectification request under Section 154 if refund calculation errors exist.
Legal Remedy:
- Writ Petition under Article 226 of the Constitution can be filed in cases of undue delay or denial.
Judicial Precedents
[1] Union of India v. Tata Chemicals Ltd. (2014) 6 SCC 335
The Supreme Court held that a resident/deductor is entitled to interest on tax refunds under Section 244A of the Income Tax Act, even when the refund pertains to tax deducted at source under Section 195(2). The Court emphasised that interest on refunds is a statutory right and applies not only to assesses but also to deductors, especially when the tax collected is later found to be in excess.
It clarified that such interest must be paid from the date of tax payment, even if the refund is not pursuant to a notice under Section 156, rejecting the Revenue’s argument that only assessees, not deductors, are eligible for such interest.
[2] Commissioner of Income Tax, Gujarat v. Gujarat Fluoro Chemicals Ltd. (2014) 358 ITR 291 (SC)
The Supreme Court clarified that assessees are entitled only to statutory interest under Section 244A of the Income Tax Act on refunds of excess tax and not interest on delayed payment of such interest.
The Court overruled the earlier interpretation in Sandvik Asia Ltd. v. CIT that was seen to allow “interest on interest,” and emphasized that unless provided by statute, no additional compensation or penal interest is payable on delayed refunds of statutory interest. Consequently, the earlier High Court order awarding 9% interest on the delayed refund and further interest on such interest was set aside.
Practical Challenges and Common Issues
- Delay in refund processing due to incomplete KYC or mismatched bank details.
- Refund set-off without notice, violating Section 245.
- Denial of interest or part refund, requiring rectification or litigation.
Refund Rules Unchanged in 2025: IT Department Issues Clarification
Amid rising concerns over refund eligibility due to the delayed filing of Income Tax Returns (ITRs), the Income Tax Department has clarified that refund provisions remain unchanged in 2025. Taxpayers can continue to claim refunds by filing the following Section 239 of the Income Tax Act, 1961. The department emphasised that late filing of ITR does not automatically disqualify a taxpayer from receiving refunds, as long as the claim is made in compliance with the relevant legal provisions.
Conclusion
Refunds are a vital component of a fair tax system, serving as a relief for taxpayers against excessive taxation. The Income Tax Act, 1961, through Sections 237–245, lays a structured and balanced framework for claiming and receiving such refunds. With judicial safeguards and online mechanisms, the process has become more streamlined, though practical challenges persist. Taxpayers must be vigilant and proactive in ensuring rightful claims are made and followed through.
