Section 234D : Interest on Excess Income Tax Refund

Why sec 234D levy, how is refund granted, Reason for levy 234D, How interest is computed, What may be the Examples for Sec 234D, what is the rate of interest 

Why Sec 234D come into Existence?

The situation arises, when a Refund is granted to the Assessee upon claiming of Income Tax refund via processing of ITR return under section 143(1) after Income Tax Return Filing. So if the Assessee has claimed excess Refund either they may be because of Miscalculation or for other Non-bonafide reasons, then the department will charge Interest on Refund granted. It’s just a Punishment in monetary terms by way of levy Interest under section 234D.

Rate of interest and Levying Period:-

The rate of interest under Section 234D is levied at 0.5% per month or a part of the month on the refund amount recoverable from the taxpayer.  Interest will be calculated from the date of granting the refund under Section 143(1) till the date until such Refunded amount is not payback along with the interest as defined under section 234D of Income Tax Act, 1961.*

An adjustment under Section 234D(2)

Where in consequence of an order under section 154 or section 155 or section 250 or section 254 or section 260 or section 262 or section 263 or section 264 or an order of the Settlement Commission under sub-section (4) of section 245D, the amount of refund granted under sub-section (1) of section 143 is held to be correctly allowed then it may be the whole or partial amount as the case may be.

Illustration

Mrs. Aanya filed her return of income declaring a refund of Rs. 1,84,000. Her return was processed under section 143(1) and the refund was granted to him of Rs.1,84,000. Consequently, the case was selected for scrutiny and a regular assessment under section 143(3) was made. But In the regular assessment, his refund was reduced to Rs. 1,20,000. What will be the interest under section 234D?

Solution:-

In the instant case initial refund of Rs. 1,84,000 was granted after processing the return under section 143(1) and, subsequently, the refund was reduced to Rs. 1,20,000.. In this case, as refund granted under intimation u/s 143(1) was higher than determined under section 143(3), the Regular Assessment. So the excess refund will be liable to Charge with the Interest under section 234D @0.5% per month or part of the month thereof. So Interest will be levied on Rs.84,000 @0.5% from the date of granted refund to the date of payment of an excess refund to the Department.