Section 437: interest on refunds

Introduction

Section 437 governs interest payable when an income-tax refund is due. The rate, period and exclusions depend on how the tax was originally paid and how the refund arose; the refund amount alone is not enough to calculate interest.

Key takeaways

The basic rule: 0.5% per month

Where a refund is due to the assessee, sub-section (1) entitles the assessee to simple interest on the refund, calculated at 0.5% for every month or part of a month, for a period that depends on why the refund arose.

When no interest is payable

Sub-section (2): no interest is payable on a refund out of TCS/advance tax/section 390(5) tax, or out of tax paid under section 266, if the amount of the refund is less than 10% of the tax as determined under section 270(1) or on regular assessment.

Refund arising from a rectification application

Sub-section (3): where the refund (out of TCS/advance tax/section 390(5) tax) arises from an order the Assessing Officer passes on an application made by the assessee under section 288(1) (rectification), interest at 0.5% per month runs from the date of that application to the date the refund is granted.

Additional interest of 3% per annum for delayed-effect orders

Sub-section (4): where a refund arises from giving effect to an order under section 359, 363, 365(10), 368, 377 or 378 - wholly or partly, and otherwise than by making a fresh assessment or reassessment - the assessee is entitled to additional interest, over and above the interest under sub-section (1), computed at 3% per annum on the refund amount.

This additional interest runs from the day after the time allowed under section 286(1) (Table Sl. Nos. 9 and 10) expires, to the date the refund is granted.

Sub-section (5): in computing this additional interest, if assessment or reassessment proceedings are pending, the period during which the Assessing Officer withholds the refund under section 438(3) is excluded.

Interest on refunds to a deductor (TDS/TCS deposits)

Sub-section (6): where a refund becomes due to a deductor in respect of an amount paid to the credit of the Central Government under Chapter XIX-B, the deductor is entitled to simple interest at 0.5% per month, running from the date a prescribed-form claim is made (or, where the refund arises from giving effect to an order under section 359, 363, 365(10) or 368, the date the tax was paid) to the date the refund is granted.

Delay attributable to the assessee or deductor

Sub-section (7): if the proceedings leading to the refund are delayed, wholly or partly, for reasons attributable to the assessee or the deductor, that period of delay is excluded from the interest-bearing period.

Sub-section (8): any dispute about what period should be excluded under sub-section (7) is decided by the Principal Chief Commissioner, Chief Commissioner, Principal Commissioner or Commissioner, and that decision is final.

Adjustment of interest and recovery of excess interest

Sub-section (9): if a later order under any of sections 270(10), 271, 279, 287, 288, 359, 363, 365(10), 368, 377 or 378 increases or reduces the amount on which interest under sub-section (1) or (3) was payable, the interest is increased or reduced accordingly.

Sub-section (10): where interest is reduced under sub-section (9), the Assessing Officer serves a notice of demand (in prescribed form) on the assessee specifying the excess interest paid and requiring repayment.

Sub-section (11): this notice of demand is deemed to be a notice under section 289, and the Act's provisions apply to it accordingly.

Step-by-step flow for interest on a refund under Section 437

1. 1

   Which row of the Table in Section 437(1) does the refund fall in?

   • Sl. No. 1 - out of tax collected at source under section 394, advance tax, or tax treated as paid under section 390(5): Period runs from 1 April of the year following the tax year if the return was furnished on or before the due date in section 263(1); otherwise from the date of furnishing the return; in each case to the date the refund is granted. Go to step 2.
   • Sl. No. 2 - out of tax paid under section 266: Period runs from the date of furnishing the return or payment of tax, whichever is later, to the date the refund is granted. Go to step 2.
   • Sl. No. 3 - any other case: Period runs from the date or dates on which tax or penalty is paid in excess of the demand in the notice under section 289, to the date the refund is granted. Go to step 3.
2. 2

   For Sl. No. 1 or 2: is the refund less than 10% of the tax determined under section 270(1) or on regular assessment?

   • Yes: No interest is payable under Section 437(2).
   • No: Go to the next step.
3. 3

   Compute the basic interest

   Simple interest at 0.5% for every month or part of a month. If a Sl. No. 1 refund arises from an order on an application under section 288(1) (Table: Sl. No. 11), the period runs from the date of the application to the date of grant (Section 437(3)). A deductor's refund under Chapter XIX-B follows Section 437(6).

4. 4

   Exclude delay attributable to the assessee or deductor

   Under Section 437(7) that period is excluded. Any question on the period is decided by the Principal Chief Commissioner, Chief Commissioner, Principal Commissioner or Commissioner, whose decision is final (Section 437(8)).

5. 5

   Check for additional interest

   If the refund arises from giving effect to an order under section 359, 363, 365(10), 368, 377 or 378 otherwise than by a fresh assessment or reassessment, additional interest at 3% a year runs from the day after the time allowed under section 286(1) (Table: Sl. Nos. 9 and 10) expires, to the date of grant. Where assessment or reassessment proceedings are pending, any period of withholding under section 438(3) is excluded (Section 437(4) and (5)).

6. 6

   Revise if the base changes

   If an order listed in Section 437(9) increases or reduces the amount on which interest was payable, the interest changes accordingly. Excess interest is recovered by a notice of demand treated as a notice under section 289 (Section 437(10) and (11)).

Practical checklist

Glossary

Simple interest

Interest calculated on the refund principal; section 437(1) specifies 0.5% for every month or part of a month, subject to its conditions.

Attributable delay

A period of delay in the refund-producing proceedings caused wholly or partly by the assessee or deductor, excluded under section 437(7).

Frequently asked questions