Library / Income-tax Act, 2025: The Professional's Master Guide

45. Collection, Recovery and Refunds

45.1 Demand and recovery

A notice of demand is issued with every order creating a liability. Tax must be paid within 30 days, unless a shorter period is specified with reasons.
If not paid, the taxpayer is an assessee in default, and simple interest at 1% a month runs from the end of the 30-day period. A penalty may also be imposed.
Recovery can be through the Tax Recovery Officer: attachment and sale of movable and immovable property, attachment of bank accounts, garnishee notices to debtors of the taxpayer, and appointment of a receiver.
Tax clearance certificates may be required from persons leaving India in specified situations.

45.2 Refunds

Refund arises where taxes paid (TDS, TCS, advance tax, self assessment tax) exceed the tax determined.
Interest on refund (section 437) is 0.5% a month from 1 April of the next year (for TDS and advance tax) or from the date of filing the return or of payment, whichever is later (for self assessment tax), to the date of grant, if the refund is at least 10% of the tax determined. No interest for the period of delay attributable to the taxpayer.
Refunds are credited to a pre-validated bank account linked to PAN.
Before granting a refund, the department can adjust it against outstanding demands of other years after giving an intimation and allowing 30 days to respond (section 438). Check the portal and respond if the demand is wrong or stayed.

Illustration 150: Refund interest

Karan's TDS for Tax Year 2026-27 is Rs. 1,50,000 and his tax is Rs. 1,00,000. He files on 20 July 2027 and receives the refund of Rs. 50,000 on 25 November 2027. Interest = 50,000 x 0.5% x 8 months (April to November) = Rs. 2,000. The refund exceeds 10% of tax, so interest is payable. The interest is taxable in the year of receipt.

Judicial view: Interest on refunds

Union of India v. Tata Chemicals Ltd. (Supreme Court, 2014): interest is payable on refund of excess tax deducted at source, since the government has had the use of the taxpayer's money; the statutory obligation to pay interest is not a matter of discretion.

Chapter summary

• Demand payable within 30 days; interest at 1% a month thereafter.

• Refund interest at 0.5% a month; refunds can be adjusted against old demands after intimation.