Interest on Your Income Tax Refund Is Taxable: How Section 244A Works in 2026

By Nitish Bharadwaj · Published Sep 12, 2026 · 6 min

Under Section 244A, the Income Tax Department pays simple interest at 0.5% a month on any refund due, computed from April 1 of the assessment year (or your filing date, if filed late) until the refund is issued — unless the refund is under 10% of your assessed tax. What most taxpayers miss: this interest is separate income, taxable under 'Income from Other Sources' in the year received, with no TDS deducted on it. This guide covers how it's calculated, where to find the figure, and what changes if the refund is later reversed.

A refund lands in the bank account a few hundred or few thousand rupees higher than expected, and most taxpayers assume it's a rounding adjustment or a mistake in their own calculation. It's neither — it's interest the Income Tax Department is legally required to pay under Section 244A whenever it holds on to your money longer than it should, and unlike the refund principal itself, that interest is fresh taxable income.

What Section 244A Actually Provides

Section 244A entitles a taxpayer to simple interest at 0.5% per month (6% a year) on any refund due — whether it arose from excess TDS, excess advance tax, or a refund determined on regular assessment. The period over which interest is calculated depends on when the return was filed: if filed on or before the due date, interest runs from April 1 of the assessment year to the date the refund is granted; if filed after the due date, interest runs only from the date of filing to the date of the refund. There's one cut-off that removes the interest altogether: if the refund works out to less than 10% of the tax determined on regular assessment, no interest is paid on it at all.

The Part Most Taxpayers Miss: The Interest Is Taxable Income

The refund principal — the excess tax you already paid — is simply your own money coming back and isn't taxed again. The interest component is different: it's compensation the government pays for holding your money, and it counts as income in the year it's actually received, reported under 'Income from Other Sources' in that year's return — not the year the original tax was paid. There's no TDS deducted on this interest by the Income Tax Department, unlike bank FD interest, which means the responsibility to report it and pay tax on it sits entirely with the taxpayer. Ignore a large interest-on-refund credit and it can quietly push you into an advance tax shortfall the following year, inviting interest under Sections 234B and 234C on top of the tax itself.

A Worked Example

Say a refund of ₹60,000 is sanctioned on 15 December of the assessment year, and the return was filed well before the due date. Interest runs from April 1 to mid-December — roughly 8 months and 15 days, rounded to 9 months for computation. At 0.5% a month, that's 60,000 × 0.5% × 9 = ₹2,700 in interest, credited along with the ₹60,000 refund. Only the ₹2,700 is taxable — and it must be declared as 'Income from Other Sources' in the return filed for the year the ₹2,700 was actually received, not the year the underlying tax was originally paid.

If the Refund Turns Out to Be Excessive: Section 234D

Occasionally a refund gets revised downward later — after a scrutiny assessment, a rectification, or an appeal outcome shows the original refund was larger than it should have been. In that case, Section 234D kicks in: the taxpayer has to repay the excess refund along with interest at 0.5% per month on the excess amount, calculated from the date the original refund was granted to the date of the fresh assessment order. It's the mirror image of Section 244A, and a reminder that the interest math runs both ways once a refund has been processed.

The amounts involved are often small enough to overlook, but they're not optional to report. If your Section 143(1) intimation or Form 26AS shows a credit for interest on refund, it belongs in that year's return under Income from Other Sources — treating it as tax-free pocket money is one of the more common, and easily avoidable, mismatches that can surface later when the department's own records are compared against what you've filed.