Section 426 Income Tax Act 2025: When Is Interest Charged on Excess Refund?

An income-tax refund received after processing a return may later be found excessive on regular assessment. Section 426 explains when the taxpayer must pay interest on that excess and how the amount is calculated.

Law in force: Income-tax Act, 2025, effective from 1 April 2026. Section 426 is titled Interest on excess refund and broadly corresponds to Section 234D of the Income-tax Act, 1961. This explanation is based on the Act as amended by the Finance Act, 2026.

When does Section 426 apply?

Section 426(1) applies where a refund was granted to an assessee under Section 270(1), but on regular assessment either no refund is due or the refund actually due is smaller than the amount already granted. The assessee must pay simple interest on the whole refund that was not due or on the excess portion, as applicable.

Interest is linked to a refund actually granted, rather than merely claimed in a return. The provision does not impose interest merely because an income-tax return has been filed or because a refund is delayed.

Section 426 explained sub-section by sub-section

Section 426(1): Liability for excess refund

If no refund is due on regular assessment, interest is calculated on the entire refund granted under Section 270(1). If some refund remains due, interest is calculated only on the excess amount. The statutory rate is 0.5% per month or part of a month, from the date the refund was granted to the date of regular assessment.

Section 426(2): Reduction following a subsequent order

If an order under Section 287, 288, 359, 363, 365(10), 368, 377 or 378 establishes that the refund was correctly granted, wholly or partly, the interest charged under Section 426(1) must be reduced accordingly.

Section 426(3): First assessment under Section 279

Where an assessment for a tax year is made for the first time under Section 279, that assessment is treated as a regular assessment for Section 426 purposes.

Relevant statutory terms and references

Assessee: The person to whom the refund is granted and whose tax liability is determined under the Act. For the formal statutory scope of this expression, consult the definitions in Section 2.

Refund granted under Section 270(1): A refund issued in the course of processing the return under that provision, which is the starting point for Section 426.

Regular assessment: The assessment against which the earlier refund is compared; Section 426(3) expressly treats a first assessment under Section 279 as regular assessment for this purpose.

Excess refund: The amount refunded under Section 270(1) over and above the amount refundable on regular assessment. This is a descriptive explanation of the statutory test, not a separately quoted definition.

Month or part of a month: The interest period is counted in months, with a part of a month attracting interest as provided in Section 426(1).

What is the interest rate on an excess income-tax refund?

Simple interest = Excess refund x 0.5% x number of months (including part-months).

The interest period begins on the date of grant of refund and ends on the date of regular assessment. The applicable principal is either the entire refund, if no refund is due, or only the excess portion if a smaller refund is due.

This is simple interest, not compound interest. Section 426 interest is different from interest payable by the Government on eligible refunds under the applicable refund-interest provisions.

Examples of interest calculation under Section 426

Example 1: Entire refund found inadmissible

An assessee receives a refund of Rs. 60,000 under Section 270(1). On regular assessment, no refund is due. Assume the statutory period covers four months or part-months. Interest = Rs. 60,000 x 0.5% x 4 = Rs. 1,200.

Example 2: Part of the refund remains due

A refund of Rs. 1,00,000 is granted, but regular assessment establishes that only Rs. 70,000 is refundable. The excess refund is Rs. 30,000. Assuming six months or part-months, interest = Rs. 30,000 x 0.5% x 6 = Rs. 900.

Example 3: Subsequent order accepts the refund

Suppose an assessment initially treats Rs. 40,000 of a refund as excessive, but a later qualifying appellate order finds that Rs. 25,000 of that amount was correctly refundable. Section 426(2) requires the interest calculation to be reduced to reflect the corrected position.

These examples are illustrative. Actual liability depends on the relevant refund and assessment dates and the operative orders.

What if the assessment is rectified or overturned?

Section 426(2) expressly provides for consequential reduction where an order under one of the listed statutory provisions holds that the refund was properly allowed in full or in part. Taxpayers should retain the refund intimation, bank credit evidence, regular assessment order, interest computation and any rectification or appellate orders.

Where an interest demand appears incorrect, verify the refund date, amount, assessment date, period counted and the effect of any later order before seeking rectification or pursuing the appropriate statutory remedy.

Frequently asked questions

Is interest payable on every income-tax refund?

No. Section 426 concerns a refund granted under Section 270(1) that is subsequently found wholly or partly excessive on regular assessment.

What rate applies to an excess refund?

Simple interest at 0.5% for each month or part of a month within the statutory period.

Does interest apply to the full refund if only part is excessive?

No. Where a smaller refund is still due, interest is calculated on the excess amount only.

Can the interest be reduced after an appeal?

Yes, where a qualifying order under Section 426(2) determines that the refund was correctly allowed wholly or partly.

Which provision applied under the Income-tax Act, 1961?

The broadly corresponding provision was Section 234D, dealing with interest on excess refund. The relevant law depends on the applicable tax year and transitional provisions.

Official statutory sources

For authoritative wording and cross-references, refer to the Income Tax Department's Section 426 text and the Income-tax Act, 2025 as amended by the Finance Act, 2026.

This article is general legal information and should be read with the applicable assessment and refund records.

Last reviewed: 12 November 2026