After getting income tax refund, need to pay tax on the interest amount

By | February 17, 2026
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After getting income tax refund, need to pay tax on the interest amount

Based on the Income-tax Act, 2025 and Draft Income-tax Rules, 2026, the answer is Yes, the taxpayer must pay tax on the interest amount received.

Here are the specific details regarding the taxability of interest on income tax refunds, using the terminology “tax year” as requested:

1. Taxability of the Interest Component

While the principal amount of the refund (which is your own excess tax returned to you) is not taxable, the interest component added to that refund is considered income.

  • Classification: This interest is classified as “Income from other sources” (since it does not fit into salaries, business, or capital gains).
  • Charging Section: Under Section 5 of the Income-tax Act, 2025, the “total income” of a person for any tax year includes all income from whatever source derived.
  • Tax Rate: This interest is added to your total income and taxed at your applicable slab rates (e.g., under the new tax regime rates specified in Section 202 or Section 201),.

2. Interest Calculation Rules (Section 437)

The interest you receive is calculated under Section 437 of the new Act.

  • Rate: The Central Government pays simple interest at 0.5% for every month or part of a month on the refund amount.
  • Period:
    • If the return was filed on or before the due date: Interest is calculated from 1st April of the relevant tax year to the date the refund is granted.
    • If the return was filed late: Interest is calculated from the date of furnishing the return of income to the date the refund is granted.

3. No Interest for Inoperative PAN (Rule 162)

A crucial new rule in the 2026 framework affects your eligibility to receive this interest.

  • Rule 162: If your Permanent Account Number (PAN) has become inoperative (for example, due to failure to link it with Aadhaar), no interest shall be payable to you for the period during which the PAN remains inoperative,.
  • Even if the refund is eventually issued after you make the PAN operative, the government will not pay interest for the specific days/months the PAN was inactive.

4. Reporting in Tax Return

You must declare this interest income in your return of income for the tax year in which it is received.

  • Annual Information Statement (Form 168): The interest paid to you by the government will likely appear in your Annual Information Statement (Form No. 168), which tracks information relating to tax deducted, collected, and demands/refunds,.