If the taxpayer has paid excess income tax, then he will claim the refund of the same in his ITR return of income and it will be refunded to him after processing of ITR return. Many times it may happen that the taxpayer is granted a refund at initial stage, i.e., at the time of intimation under section 143(1) and at a later stage (i.e., on regular assessment) the refund gets reduced. In other words, a taxpayer get income tax refund over the eligible amount of refund which is compute as per the provision of income tax on regular assessment. In such a case the excess income tax refund is recovered from the taxpayer along with interest under section 234D.

(i) no refund is due on regular assessment; or

(ii) the amount of income tax refund after ITR processing under section 143(1) exceeds the amount refundable on regular assessment.

It generally means an assessment under section 143(3), i.e., scrutiny assessment or an assessment under section 144, i.e., best judgment assessment. Assessment made for first time under section 147 or section 153A shall also be treated as regular assessment.

For calculating Interest on excess income tax refund, interest under section 234D is levied @ ½ % per month or part of the month if any excess income tax refund is allow to taxpayers.

Interest is levied from the date of grant of refund under section 143(1) on ITR processing till the date of regular assessment.

Interest under section 234D is levied on the whole or the excess amount of income tax refund. So if any excess income tax refund refund allow then Interest is levied on the the excess amount of income tax refund.

As per Rule 119A, while calculating the interest payable by the taxpayer or the interest payable by the Central Government to the taxpayer under any provision of the Act:

Period for calculation of interest on excess income tax refund

Interest is to be calculated on annual basis | Interest is to be calculated for every monthly basis |

The period for which such interest is to be calculated shall be rounded off to a whole month or months. For this purpose, any fraction of a month shall be ignored and the period so rounded off shall be deemed to be the period in respect of which the interest is to be calculated | The period for which such interest is to be calculated shall be for every month or part of a month comprised in a period, any fraction of a month shall be deemed to be a full month and the interest shall be so calculated |

Calculation of amount for payment of interest.

The amount of income tax refund in respect of which such interest is to be calculated shall be rounded off to the nearest multiple of one hundred rupees. For this purpose any fraction of one hundred rupees shall be ignored and the amount so rounded off shall be deemed to be the amount in respect of which the interest is to be calculated.

This can be easily understand by following example:-

Interest on income tax refund of Rs 12,692 for 6 month 10 days. Any fraction of Rs. 100 is to be ignored and, hence, we will ignore Rs. 92 from Rs. 12,692 | |

Balance amount will be Rs 12,600 so interest under section 234D will be computed on Rs 12,600 | Rs 12,600 |

The period of 10 days will be considered as full month and, hence, interest will be computed for 7 months | 7 Months |

Source: Income Tax