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Section 437 Income Tax Act 2025: How Is Interest on Income Tax Refunds Calculated?

When a taxpayer receives an income-tax refund, Section 437 may also entitle the taxpayer to interest. The amount depends on the source of the tax payment, when the return was filed, the refund amount and the time taken to grant it.

Law in force: Income-tax Act, 2025, effective from 1 April 2026. This article considers the Act as amended by the Finance Act, 2026. Section 437 broadly corresponds to Section 244A of the Income-tax Act, 1961; the law applicable to earlier tax periods must be checked separately.

What does Section 437 provide?

Under Section 437(1), an assessee entitled to a refund is generally entitled to simple interest at 0.5% for every month or part of a month for the applicable period. The provision divides refunds into categories according to the type of tax payment. It does not provide the same starting date for every refund.

Interest is calculated on the eligible refund, not automatically on all tax paid during the year. Statutory exclusions, adjustments and later orders can change the amount payable.

When does refund interest begin?

Refund category	Interest period under Section 437(1)
Tax collected at source under Section 394, advance tax, or tax treated as paid under Section 390(5)	From 1 April following the tax year until refund is granted, if the return was furnished by the due date under Section 263(1); otherwise from the date the return was furnished until refund is granted.
Tax paid under Section 266 (self-assessment)	From the later of the date of furnishing the return or the date of payment, until refund is granted.
Other cases, including excess payment against a notice of demand under Section 289	From the relevant date or dates on which tax or penalty was paid in excess of the demand, until refund is granted.

Note: The first category refers to tax collected at source, advance tax and tax treated as paid under Section 390(5). Other payments must be classified under the appropriate statutory category.

Is interest payable on every refund?

No. Under Section 437(2), no interest is payable for refunds falling within Table serial numbers 1 and 2 of Section 437(1) if the refund is less than 10% of the tax determined under Section 270(1) or on regular assessment. This restriction is expressly linked to those two categories, and should not be indiscriminately applied to every refund.

Example: If the relevant tax determined is Rs. 1,00,000 and the eligible refund is Rs. 8,000, the refund is below 10%. Interest under the first or second category is therefore not payable, although the refund itself may still be due.

Can additional interest arise after an appeal?

Yes. Under Section 437(4), where a refund arises from giving effect to certain appellate or other specified orders without a fresh assessment or reassessment, an additional 3% per annum may be payable on the relevant refund. This is in addition to the ordinary interest under Section 437(1).

The additional-interest period starts on the day after expiry of the time allowed under Section 286(1), Table serial numbers 9 and 10, and ends when the refund is granted. Section 437(5) excludes a qualifying period for which a refund is withheld under Section 438(3) while assessment or reassessment proceedings are pending.

Other important rules under Section 437

Refund arising from a specified application

Section 437(3) provides a specific starting point for a refund in the first category arising from an Assessing Officer's order following an application under Section 288(1), Table serial number 11: interest runs from the date of that application until the refund is granted.

Interest payable to a deductor

Section 437(6) deals with refunds to a deductor of amounts deposited under Chapter XIX-B. The interest rate is 0.5% per month or part of a month, ordinarily from the prescribed refund claim date, or from the tax-payment date in the specified appellate-order situations, until the refund is granted.

Delay attributable to the taxpayer

Under Section 437(7), a period of delay attributable to the assessee or deductor is excluded when calculating interest. Section 437(8) assigns disputes over such exclusion to the specified senior income-tax authority.

Recalculation after subsequent orders

Sections 437(9) to (11) require interest to be increased or reduced when specified later orders change the amount on which interest was payable. Excess interest previously paid can be recovered through a notice of demand treated as a notice under Section 289.

How is interest calculated? Practical examples

Simple refund interest = Eligible refund amount x 0.5% x number of months (including any part of a month)

Example 1: Timely return and advance-tax refund

Assume an eligible refund of Rs. 40,000, a return filed within the Section 263(1) due date, and an applicable interest period of five months. Assuming the 10% threshold is satisfied and no period is excluded, interest is Rs. 40,000 x 0.005 x 5 = Rs. 1,000.

Example 2: Late return

Assume a qualifying advance-tax refund of Rs. 60,000 and a return furnished after its due date. If the period from filing the return to granting the refund is three months or parts of months, interest is Rs. 60,000 x 0.005 x 3 = Rs. 900, subject to the statutory conditions.

Example 3: Self-assessment tax paid after return filing

If the return is furnished on 10 June, self-assessment tax is paid on 20 June and the refund is granted later, the interest period for that payment starts on 20 June, the later of the two dates. The actual number of chargeable months or parts must be calculated from the applicable dates.

These illustrations are simplified. Actual interest may differ because of the type of payment, refund threshold, adjustments, delays or later orders.

Relevant statutory terms

Assessee: A person whose income, tax liability or other sum is dealt with under the Act, as covered by its statutory definition and context.

Refund: An amount of tax or other eligible payment refundable under the Act because the amount paid or treated as paid exceeds the amount properly payable.

Tax year: The period relevant for determining income and tax liability under the Income-tax Act, 2025.

Self-assessment tax: Tax paid by the taxpayer under Section 266 while determining the liability accompanying the return.

Regular assessment: Assessment under the relevant assessment provisions, as distinguished from the initial processing of a return.

Simple interest: Interest calculated on the qualifying principal refund amount without compounding interest upon interest.

Frequently asked questions

What is the refund interest rate under Section 437?

The ordinary rate is 0.5% per month or part of a month. A separate additional 3% annual rate may apply to qualifying refunds after specified orders.

Does filing an income-tax return late affect interest?

Yes. For advance tax, TCS and tax treated as paid under Section 390(5), a return filed after the due date generally moves the interest starting point to the date of filing.

Is the 10% minimum applicable to all refunds?

No. Section 437(2) expressly applies the restriction to the first two categories in the Section 437(1) table.

Can interest be reduced if the taxpayer caused the delay?

Yes. The attributable delay is excluded from the interest period under Section 437(7).

Which earlier law corresponds to Section 437?

Section 244A of the Income-tax Act, 1961 is the broadly corresponding earlier provision.

Official legal source

For the full text, including all conditions and cross-references, consult the Income-tax Act, 2025 as amended by the Finance Act, 2026 (Income Tax Department).

Last reviewed: 12 November 2026. This article provides general statutory information and does not replace advice on the facts of an individual assessment or refund.