Delay in Income Tax Refunds: Is the Government Liable to Pay Interest to Assessee

In the last few days, many taxpayers (specifically salaried people) got a scary SMS/email saying their ITR processing or refund is “put on hold” under risk management. People expected a normal refund, but suddenly a message came and it did not clearly tell what mistake. News reports say this is happening mainly where deduction/exemption claims don’t match with Form 16 / AIS / 26AS, and also where donation claims are big and look doubtful.

At the same time, CBDT has officially said it is running a “NUDGE” campaign (Non-intrusive Usage of Data to Guide and Enable) and asking identified taxpayers to voluntarily review and correct potentially ineligible claims. 31 December 2025 is the last date to file a revised return for many cases.

Tax Experts are also saying that a real-time refund tracker should be introduced because refund status is too confusing for the common taxpayer.

So naturally, everyone wonders if my refund is delayed (even after the return is processed), will the Government pay interest or not? Let’s break it down properly.

Section 244A (interest on refund)

If refund of any amount becomes due to the assessee under the Act, then assessee shall get simple interest on it (subject to conditions). Rate is 0.5% per month (that is 6% per year).

“244A (a) where the refund is out of any tax ³⁰[ paid under section 115WJ or] ³¹[collected at source under section 206C or] paid by way of advance tax or treated as paid under section 199, during the financial year immediately preceding the assessment year, such interest shall be calculated at the rate of ³²[one-half per cent] for every month or part of a month comprised in the period from the 1st day of April of the assessment year to the date on which the refund is granted:

Provided that no interest shall be payable if the amount of refund is less than ten per cent of the tax as determined ³³[under ³⁴ [sub-section (1) of section 115WE or] sub-section (1) of section 143 or] on regular assessment;”

From which date interest starts (and when it stops)

This is where most confusion happens. Section 244A divides it into two broad buckets:

A) Refund out of TDS/TCS/Advance tax (and tax treated as paid)

Interest is calculated at 0.5% per month:

• from 1 April of the Assessment Year to date refund is granted, if ITR was filed on or before due date; or
• from the date of filing the return to date refund is granted, if the return was filed late.

B) “Any other case” (commonly includes demand payments, some self-assessment situations)

Interest is calculated from the date(s) of payment to the date refund is granted.

Important practical point

Interest should run till the refund is actually granted/credited, not just till an internal order date. Delhi High Court in Wabtec Locomotive (W.P.(C) 4405/2022) dealt with the problem where CPC computed interest only till 143(1) intimation date, the court directed that interest should be granted till the actual refund issuance/credit and AO can pass manual order if system limitation exists.

Extra interest in appeal-effect cases: Section 244A(1A)

If refund arises because you win in appeal/revision (CIT(A), ITAT, etc.) and department delays giving effect, then apart from normal 244A(1) interest, Section 244A(1A) provides additional interest @ 3% per annum for the delay period linked to time-limit under Section 153(5).

So, basically if you already won and the Department is still slow, you get extra compensation (but still within the Act framework).

When interest can be reduced: Section 244A(2)

The government can reduce the interest period if the refund got delayed due to the assessee's own fault. Section 244A(2) says that if proceedings resulting in refund are delayed for reasons attributable to assessee (fully or partly), that delay period is excluded from interest computation.

Example of taxpayer-caused delay:

• not responding to e-verification / notices on time
• wrong bank account details and not fixing it
• not uploading required info for processing

Can the Department hold or adjust your refund? Section 245 / 245(2)

A) Adjustment against old demand (set-off): Section 245

Section 245 allows the Department to set-off your refund against outstanding tax demand, but only after giving intimation in writing of proposed action.

“245. Set off of refunds against tax remaining payable.

- Where under any of the provisions of this Act, a refund is found to be due to any person, the [Assessing Officer] [ Substituted by Act 4 of 1988, Section 2, for " Income-tax Officer" (w.e.f. 1.4.1988).], [Deputy Commissioner (Appeals)] [ Substituted by Act 4 of 1988, Section 2, for " Appellate Assistant Commissioner" (w.e.f. 1.4.1988).][, Commissioner (Appeals)] [ Inserted by Act 29 of 1977, Section 39 and Schedule V (w.e.f. 10.7.1978).] or [Chief Commissioner or Commissioner] [ Substituted by Act 4 of 1988, Section 2, for " Commissioner" (w.e.f. 1.4.1988).], as the case may be, may, in lieu of payment of the refund, set off the amount to be refunded or any part of that amount, against the sum, if any, remaining payable under this Act by the person to whom the refund is due, after giving an intimation in writing to such person of the action proposed to be taken under this section.”

B) Withholding refund during pending assessment/reassessment: Section 245(2)

Under Section 245(2), the Assessing Officer can stop or hold the refund if assessment or reassessment is still pending and giving refund may harm the Revenue. But AO has to record proper reasons and also take required approval, it cannot be done just like that.

CBDT has also issued Instruction No. 02/2023 dated 10 November 2023, which explains time limits, money limits and the process to be followed for holding refunds under Section 245(2).

So legally yes, refund can be held in some cases, but only by following the proper procedure. It cannot be random or without reason.

Case Laws:

1) Union of India v. Tata Chemicals Ltd (CIVIL APPEAL NO. 6301 OF 2011)

The Supreme Court said interest on refund is basically compensation for keeping taxpayer’s money. Refund is not enough, interest must follow as per law.

2) Maple Logistics (W.P.(C) 7003/2019)

Delhi HC said refund cannot be withheld in a mechanical way. Reasons must be recorded and approvals must show real application of mind. This case became a big reference point for “refund withheld” litigation.

3) Sandvik Asia (Appeal (civil) 1337-1340 of 2005) and later clarification in Gujarat Fluoro (Supreme Court, 2013/2014)

Sandvik had extreme delay facts; later Gujarat Fluoro Chemicals clarified that generally taxpayer get only statutory interest and courts should not routinely award “extra interest” beyond the Act.

4) CIT v. H.E.G. Ltd (CIVIL APPEAL NO. 8176 OF 2009)

The Supreme Court held that once interest becomes part of the “amount due”, it can be treated as part of the refundable amount for the purpose of Section 244A. This is often discussed as “interest on interest” confusion but technically it is about short-payment of what is due.

5) ACIT v. TSI Business Parks (Supreme Court, 2025)

The Supreme Court corrected a High Court direction that granted 15% interest, and said statutory rate under Section 244A is 6% p.a., so courts cannot freely apply a higher rate just because delay happened.

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