Tax refund concerning applicability of provisions of section 234D

* Initially, based on the processing of the income tax return, a refund may be granted to the taxpayer under intimation as per section 143(1),
* Subsequently, the taxpayer can be subjected to scrutiny,
* During the regular assessment, it may happen that the refund amount so granted under section 143(1) is either reduced or is totally nullified,
* Accordingly, the refund so received by the taxpayer under section 143(1) needs to be paid back to the department.
* Interest under section 234D is payable on such refund amount.

Interest is charged under section 234D of the Income Tax Act in the following situations:
• A refund is issued under section 143(1), but no refund is due as per regular assessment; or
• The amount of the refund granted under section 143(1) exceeds the amount refundable as per regular assessment.

Meaning of regular assessment
Regular assessment, in general, refers to and includes:
• a scrutiny assessment under section 143(3); or
• a best judgement assessment under section 144.

Notably, an assessment made for the first time under section 147 or section 153A will also be treated as a regular assessment, according to explanation 1 to section 234D.

Rate of interest payable under the provisions of section 234D 
If the requirements of section 234D are invoked, the taxpayer will be required to pay interest at the rate of 0.5 percent per month, or a part thereof.

Period for which interest is chargeable under section 234D
The taxpayer will be liable to pay interest under section 234D from the date of granting of the refund amount till the date of regular assessment.

Amount on which interest is chargeable under section 234D
Interest under section 234D will be levied on the whole amount or the excess amount of refund.

Order adjustments allowed under section 234D
Interest chargeable under section 234D will be adjusted as a result of any of the following orders if the amount of refund granted under section 143(1) is held to be correct-
1. Section 154 – Rectification of mistake,
2. Section 155 – Other amendments,
3. Section 250 – Order of Commissioner (Appeals),
4. Section 254 – Order of Appellate Tribunal,
5. Section 260 – Judgment of High Court/ Supreme Court,
6. Section 262 – Hearing before Supreme Court,
7. Section 263 – Revision of orders which are prejudicial to the revenue,
8. Section 264 – Revision of other orders

Manner of computation of interest [rule 119A]
Rule 119A of the Income Tax Rules briefs the manner of computation of interest. The same is detailed hereunder-
• Interest calculation on annual basis-
The period of which interest is to be calculated will be rounded off to the whole month/ months. Accordingly, interest will be calculated for a period based on such rounded off month/ months.
• Interest calculation on monthly basis-
Calculation of interest for a part of the month comprised in a period/ a fraction of month is to be done by considering the same as a full month.
• Rounding off of the amount of interest-
The amount on which interest is to be calculated will be rounded off to the nearest multiple of one hundred. Any fraction of INR 100 will be ignored and such rounded off amount will be considered for calculation of interest payable.