Arnav Pandya

There are a lot of people who receive their tax refunds late and this means that there is also an extra amount coming in for them. This is due to the interest that is earned on the tax refund and the question that arises after this is the tax impact of the amount. There will have to be a separation of the actual amount of the refund and the interest that is earned on this amount and this can be given its respective impact. A correct impact is essential because one should not be in the position where the amount received from the tax department itself is shown in an incorrect manner. Here is a detailed look at the issue and how this should be handled.

Interest on refund

There might be occasions when the tax payer has to get some amounts from the tax department because either they have paid too much advance tax or the amounts that have been deducted at source is more than what they have to pay. There are also cases wherein some benefits are not claimed by the salaried individual at the time of the submission of the details to their employer leading to more tax being deducted than what is required. If the extra amount is claimed back at the time of filing of the tax return then there would be a refund coming in. In case the refund is delayed then there would be an interest that is paid along with the amount of the refund. This is how the interest figure arises on the refund.

Assessment order

The first thing that the tax payer has to do is to take a close look at the assessment order that has been intimated by the tax department. This will have all the details related to the assessment of tax and on one side there will be the figures that the individual has put in their tax return and along with it there will be the actual figures at which the tax has been assessed by the tax official. This will give the picture as to the actual amount of refund that would have to be received by the individual and it will also have the interest figure calculated and mentioned. One of the ways in which the individual knows that there is an interest on refund is by looking at the amount of the refund which would be more than what they had claimed while filing the return.

Tax impact

Many people do not include the interest earned on income tax refund saying that this is not their income as this is the amount given by the tax department itself. But that would not be correct because the actual way in which this needs to be treated is that the amount has to be included as income for the purpose of taxation. The income thus would be taxed without any reduction and at the same time this would be included under the head of Income from other sources.

Not showing the amount as income can lead to some problems because this can become a condition for the tax authorities sending a notice to the taxpayer about not correctly declaring their income. Here the details are available with the tax department and hence they will be in a position to point out that this needs to be included. In case the amounts are small then this might not be directly visible but when it comes to larger amounts there would have to be special care taken to ensure that the right amount is shown in the tax returns.