Interest on Excess Refund Under the Income Tax Act 2025: 0.5% a Month (Section 426)
Under section 426 of the Income-tax Act, 2025, if the department refunds you money when your return is processed and a later regular assessment shows that refund was wrong, in whole or in part, you must pay simple interest at 0.5% for every month or part of a month on the excess. The clock runs from the date the refund was granted to the date of the regular assessment.
It affects any taxpayer whose return is first processed with a refund and then picked up for a detailed assessment. This guide explains when the interest applies, how to count the months, and how it reduces if you win an appeal or rectification. All figures are from the Act as amended by the Finance Act, 2026 (tax year 2026-27 returns in the examples), and were last checked against that text on 10 November 2026.
When does interest on excess refund apply?
Two things must both be true under section 426(1):
- A refund was granted to you under section 270(1), the provision under which your return is processed, the tax is computed after adjustments and credit for TDS, TCS and advance tax, and any refund due is granted; and
- On regular assessment, either (a) no refund was due at all, or (b) the refund you received is more than what you were actually entitled to.
In case (a) the interest is on the whole refund. In case (b) it is only on the excess. The section is written "subject to the other provisions of this Act", so it sits alongside the rules on assessment, rectification and appeal described below.
What is the rate and how are the months counted?
| Element | What section 426 says |
|---|---|
| Rate | 0.5% per month, simple interest (426(1)) |
| Base | The whole refund if none was due, or only the excess refunded (426(1)(a), (b)) |
| Counting | Every month or part of a month |
| Start | Date of grant of the refund |
| End | Date of the regular assessment |
| Reduction | Interest falls if a later order holds the refund correctly allowed in whole or part (426(2)) |
Simple interest means no interest on interest. A part of a month counts as a full month, so one extra day beyond a complete month adds another 0.5%.
What counts as a "regular assessment"?
The Act does not use the phrase as a defined term in section 426, but two points are clear from the text:
- Section 270(10) provides that, after notice and hearing evidence, the Assessing Officer makes an assessment by a written order and determines the sum payable or the refund due. That is the detailed assessment that normally ends the interest period.
- Section 426(3) says that where an assessment for a tax year is made for the first time under section 279 (income escaping assessment), that assessment is treated as the regular assessment for this section. This matters when no earlier assessment was made and the department later reassesses.
How is the interest calculated? Two worked examples
Assumptions: returns for tax year 2026-27 (filed in 2027), simple interest, and months counted from the grant date, with a leftover part-month counted as one full month.
| Example 1: no refund due | Example 2: part of the refund is excess | |
|---|---|---|
| Refund granted under 270(1) | Rs 80,000 on 15 June 2027 | Rs 1,20,000 on 5 August 2027 |
| Refund due on regular assessment | Nil | Rs 70,000 |
| Base for interest | Rs 80,000 (whole refund) | Rs 1,20,000 - Rs 70,000 = Rs 50,000 |
| Date of regular assessment | 20 December 2027 | 3 January 2028 |
| Months | 15 Jun to 15 Dec = 6 full months, plus 16 to 20 Dec as part of a month = 7 | 5 Aug to 5 Dec = 4 full months, plus 6 Dec to 3 Jan as part of a month = 5 |
| Interest | 80,000 x 0.5% x 7 = Rs 2,800 | 50,000 x 0.5% x 5 = Rs 1,250 |
What if an appeal or rectification changes the picture?
Section 426(2) reduces the interest if an order under section 287 (rectification), 288 (other amendments), 359 (procedure in appeal), 363 (Appellate Tribunal orders), 365(10) (effect of a High Court judgment), 368 (Supreme Court) or 377 or 378 (revision) holds the refund to have been correctly allowed, wholly or partly.
Take Example 2. Suppose the appeal authority later holds Rs 30,000 of the Rs 50,000 excess was correctly refunded. The excess falls to Rs 20,000, and on the same 5 months the interest becomes 20,000 x 0.5% x 5 = Rs 500. If the whole refund is held correct, no interest is chargeable under this section.
Is the refund amount rounded before interest is worked out?
Yes. Rule 269 of the Income-tax Rules, 2026 covers how interest is calculated under the Act. For interest charged "for every month or part of a month", any fraction of a month is treated as a full month (rule 269(b)). The sum on which interest is calculated is rounded to a multiple of Rs 100, and any fraction of Rs 100 is ignored (rule 269(c)).
Example: excess refund of Rs 5,660, interest period of 5 months and 17 days. The base becomes Rs 5,600 and the period 6 months, so interest is 5,600 x 0.5% x 6 = Rs 168. The round-figure examples above are unaffected because they are already multiples of Rs 100.
Real-life examples
Ravi, a salaried employee. Ravi files his return, claims a deduction without attaching the proof the Act requires, and the processing system grants a refund of Rs 25,000. The Assessing Officer later calls for evidence under section 270(8), finds the claim unsupported, and completes the assessment with no refund due. Ravi returns the refund and also owes 0.5% a month on Rs 25,000 for the months between the refund and the assessment.
Meena, a consultant. Meena receives a Rs 60,000 refund. A hearing under section 270(10) leaves her entitled to Rs 45,000. Interest runs only on the Rs 15,000 difference. She files an appeal and wins on Rs 10,000 of it, so section 426(2) shrinks the interest base to Rs 5,000.
Common mistakes
- Charging interest on the whole refund when only part is excess. Under 426(1)(b) the base is the amount that exceeds what was refundable.
- Counting only complete months. A part of a month is counted as a full month.
- Compounding the interest. Section 426 provides simple interest.
- Forgetting to recompute after an appeal, rectification or revision order. Section 426(2) reduces the interest to match.
- Assuming the interest period ends at the notice date. It ends on the date of the regular assessment.
Quick reference
| Question | Answer | Provision |
|---|---|---|
| Rate | 0.5% per month, simple | 426(1) |
| Period | Grant of refund to regular assessment | 426(1) |
| Part of a month | Counted as a month | 426(1) |
| First assessment under escaped-income provision | Treated as regular assessment | 426(3) |
| Rounding of base amount | Multiple of Rs 100, fraction ignored | Rule 269(c) |
| Refund later held correct | Interest reduced accordingly | 426(2) |
How can you avoid it?
Interest arises only if the refund proves wrong. Claiming only what you can support, filing the information the return asks for, and responding to the communication sent before processing adjustments under section 270(2) all reduce the chance of an excess refund. For a CA firm, the practical task is tracking which clients received refunds and which have a pending notice or assessment. Finexo's practice management software lets you keep those client deadlines and notices in one place. It does not compute interest or file anything for you.
Where this is in the Act
- Section 426(1): rate, base and period of interest on excess refund
- Section 426(2): reduction after orders under sections 287, 288, 359, 363, 365(10), 368, 377 or 378
- Section 426(3): first assessment under section 279 treated as regular assessment
- Rule 269 (Income-tax Rules, 2026): part of a month as full month; base rounded to a multiple of Rs 100
- Section 270(1): processing of return and grant of refund; section 270(10): assessment order after hearing
This article is general information, not tax advice. For related reading, see TDS on rent under the Income-tax Act, 2025.
Frequently Asked Questions
What is the rate of interest on excess refund under the Income Tax Act 2025?
Section 426(1) charges simple interest at 0.5% for every month or part of a month. It applies to the whole refund if none was due, or to the excess if the refund was more than what was refundable on regular assessment.
From when to when does the interest run?
From the date the refund was granted under section 270(1) to the date of the regular assessment.
Is a part of a month counted as a full month?
Yes. Interest is charged for every month or part of a month, so even a few days beyond a complete month count as one more month.
Does the interest reduce if I win an appeal?
Yes. Under section 426(2), if an order under section 287, 288, 359, 363, 365(10), 368, 377 or 378 holds the refund to be correctly allowed in whole or part, the interest is reduced accordingly.
What is a regular assessment for section 426?
Section 270(10) provides for the assessment order made after hearing the assessee. Section 426(3) adds that the first assessment made for a tax year under section 279 is treated as the regular assessment.
Who pays the interest under section 426, the taxpayer or the department?
The assessee. Section 426(1) makes the assessee liable to pay simple interest on the whole or excess refund received under section 270(1).
Is the refund amount rounded before computing the interest?
Yes. Under rule 269(c) of the Income-tax Rules, 2026 the amount is rounded to a multiple of Rs 100, ignoring any fraction, and under rule 269(b) a part of a month counts as a full month.