Chapter XIX - Collection and Recovery of Tax
Section 426
Section 426: interest on excess refund
Section 426 is the flip side of refund interest: if a refund granted on the basis of Section 270(1) later turns out to have been too much - because no refund was actually due on regular assessment, or the refund exceeded what regular assessment shows was due - the assessee must pay interest on the excess.
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This article is for general information. Refer to the Income-tax Act, 2025 as amended by the Finance Act, 2026 and the Taxation and Other Laws (Amendment) Act, 2026 for the official provisions. If you need professional advice for your situation, contact Bizeneed.
Statutory text
Bare law
(1) Subject to the other provisions of this Act, where any refund is granted to the assessee under section 270(1), and— (a) no refund is due on regular assessment; or (b) the amount refunded under section 270(1) exceeds the amount refundable on regular assessment, the assessee shall be liable to pay simple interest at the rate of 0.5% on the whole or the excess amount so refunded, for every month or part of a month comprised in the period from the date of grant of refund to the date of such regular assessment.
(2) Where, as a result of an order under section 287 or 288 or 359 or 363 or 365(10) or 368 or 377 or 378, the amount of refund granted under section 270(1) is held to be correctly allowed, either in whole or in part, then, the interest chargeable, if any, under sub-section (1) shall be reduced accordingly.
(3) Where in relation to a tax year, an assessment is made for the first time under section 279, the assessment so made shall be regarded as a regular assessment for the purposes of this section.
Introduction
Section 426 charges interest when a refund granted on return processing under section 270(1) turns out, on regular assessment, not to have been due or to have been excessive. A later order confirming refund entitlement can reduce that interest.
Key takeaways
Two triggers
There is no refund due on regular assessment, or the earlier refund exceeds the regular-assessment amount.
Interest measure
Simple interest is 0.5% for every month or part month on the whole or excess refund from grant to regular assessment.
Later correction
An order holding the refund correctly allowed in whole or part reduces the interest accordingly.
Trigger: early refund exceeds assessed entitlement
Interest arises when a refund granted under section 270(1) is not due on regular assessment, or exceeds the refund found due on regular assessment. The interest base is the whole early refund in the first case and only the excess in the second.
Rate and calculation period
Simple interest is 0.5% for every month or part of a month from the date the section 270(1) refund was granted to the regular assessment date. Preserve both dates and the assessed refund calculation.
Later orders can reduce interest
If a later order under one of the provisions listed in section 426(2) holds the original refund correctly allowed in whole or part, the chargeable interest is reduced accordingly. A first assessment under section 279 counts as a regular assessment for this purpose.
Step-by-step flow for interest on excess refund under Section 426
- 1
Was a refund granted to the assessee under Section 270(1)?
- No: Section 426 does not apply.
- Yes: Go to the next step.
- 2
On regular assessment, is no refund due, or is the refundable amount lower than the refund granted?
An assessment made for the first time under Section 279 counts as a regular assessment (Section 426(3)).
- No, the refund was fully due: No interest arises under Section 426.
- Yes: Go to the next step.
- 3
Find the base amount
The whole refund if nothing is refundable, or the excess of the refund over the amount refundable on regular assessment.
- 4
Compute interest
Simple interest at 0.5% for every month or part of a month, from the date the refund was granted to the date of the regular assessment (Section 426(1)).
- 5
Did a later order hold the refund correctly allowed?
If an order under any section listed in Section 426(2) holds the Section 270(1) refund correctly allowed, in whole or in part, the interest is reduced accordingly.
Practical checklist
Do
- Keep both the section 270(1) refund grant date and the regular assessment order.
- Recalculate only the whole or excess refund, as the case requires, and account for a later modifying order.
Avoid
- Do not charge interest on the entire refund when the regular assessment confirms part was due.
Illustrative example
Worked example: refund partly reversed
Hypothetical facts (illustration only, not a real taxpayer): A refund of an assumed ₹80,000 is granted to Ms. Shah under Section 270(1) on 1 June 2027. The regular assessment is completed on 20 March 2028 and finds only ₹30,000 refundable.
Excess refund
₹80,000 − ₹30,000 = ₹50,000.
Period
From 1 June 2027 to 20 March 2028: June 2027 to February 2028 is 9 full months, and 1 to 20 March 2028 is part of a month, so 10 months.
Interest
₹50,000 × 0.5% × 10 = ₹2,500.
Later appeal
Assume an appellate order later holds ₹20,000 of the excess to have been correctly allowed. The excess becomes ₹30,000, and the interest is reduced accordingly. Recomputed on the same period, it is ₹30,000 × 0.5% × 10 = ₹1,500, a reduction of ₹1,000.
Outcome
- Interest is ₹2,500 on the regular assessment, and ₹1,500 after the assumed appellate order.
- Section 426(2) says only that interest is reduced accordingly; the recomputation shown is illustrative.
Frequently asked questions
What interest rate applies to an excess refund under Section 426?
Simple interest at 0.5% for every month or part of a month, on the whole or excess refunded amount, for the period from the date the refund was granted to the date of the regular assessment.
When does interest on excess refund apply?
When a refund granted under Section 270(1) turns out to be wrong on regular assessment - either because no refund was actually due, or because the amount refunded exceeded the amount properly refundable on regular assessment.
Can this interest be reduced later?
Yes - if a later appellate or other specified order holds that the Section 270(1) refund was correctly allowed, wholly or in part, the interest chargeable under Section 426(1) is reduced accordingly.
Need help applying this provision to your situation?
Understand interest owed on an excess income tax refundLast updated 9 October 2026