At times it may so happen that the taxpayer is granted excess refund. Section 234D of Income Tax Act, 1961 provides for levy of interest on excess refund granted to the taxpayer. 

In this blog of Law Legends you can gain knowledge about various provisions relating to interest on excess refund granted to the taxpayer.

Before understanding the provisions of section 234D, it is important to understand the provisions of Rule 119A of Income Tax Rules, 1962 which gives the manner of computation of interest under the Income-tax Act.
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:

1. Where interest is to be calculated on annual 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; 

      b. Where the interest is to be calculated 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; 
      c. The amount of tax, penalty or other sum in respect of which such interest is to be calculated                  shall be rounded off to the nearest multiple of Rs.100. For this purpose any fraction of Rs.100/-            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.

EXAMPLE-1
If we want to compute interest u/s 234D on Rs.9,599/- for 4 months and 11 days, then as per Rule 119A discussed above, while computing the amount liable to interest, any fraction of Rs.100/- is to be ignored and, hence, we will ignore Rs.99/- from Rs.9,599/- and the balance amount will come to Rs.9,500/-, thus interest u/s 234D will be computed on Rs.9,500. Further, the period of 11 days will be considered as full month and, hence, interest will be computed for 5 months. The same rule will apply for computation of interest under other sections too.

BASIC PROVISIONS
If the taxpayer has paid excess tax, then he will claim the refund of the same in his ITR and it will be refunded to him. Many times it may happen that the taxpayer is granted a refund at initial stage, i.e., at the time of intimation u/s 143(1) and at a later stage (i.e., on regular assessment) the refund gets reduced. In such a case the excess refund is recovered from the taxpayer along with interest u/s 234D.
U/s 234D interest is levied if any refund is granted to the taxpayer u/s 143(1) and:

1. No refund is due on regular assessment; or
2. The amount refunded u/s 143(1) exceeds the amount refundable on regular assessment.

Regular assessment generally means an assessment u/s 143(3), i.e., scrutiny assessment or an assessment u/s 144, i.e., best judgment assessment. Assessment made for first time u/s 147 or section 153A shall also be treated as regular assessment.
 
 EXAMPLE-2
Mr. Aakash has filed his ITR declaring a refund of Rs.42,000. His return was processed u/s 143(1) and refund was granted to him. Subsequently, his case was selected for scrutiny u/s 143(3) and a regular assessment was made u/s 143(3). In the regular assessment, his refund was reduced to Rs.25,000. Will he be liable to pay any interest u/s 234D?
In this case initial refund of Rs.42,000/- was granted after processing the return u/s 143(1) and, subsequently, on regular assessment the refund was reduced to Rs.25,000. Hence, in this case Mr. Aakash was granted excess refund of Rs.17,000/-. He will be liable to repay the excess refund amount received earlier along with interest u/s 234D. In other words, Mr. Aakash will be liable to pay interest u/s 234D on the excess refund of Rs.17,000.

RATE OF INTEREST
Interest u/s 234D is levied @ ½ % per month or part of the month.

PERIOD OF LEVY OF INTEREST
Interest is levied from the date of grant of refund u/s 143(1) till the date of regular assessment.
 
EXAMPLE-3
The tax liability of Mr. Vikas for the FY 21-22 came to Rs.42,000. He has paid advance tax of Rs.50,000/- and there was a TDS credit of Rs.2,000/- in his account. He filed ITR on 15^th July, 2022 claiming a refund of Rs.10,000. His assessment was completed u/s 143(1) and he was granted refund of Rs.10,000/- on 15^th January, 2023. Subsequently, his case was selected for scrutiny and his income was assessed u/s 143(3). As per the assessment order dated 29^th August, 2023, his income was recomputed after making certain additions and his revised tax liability was computed at Rs.50,000. Will he be liable to pay interest u/s 234D, if yes, then for what period?
In this case, the tax liability of Mr. Vikas as per ITR was Rs.42,000/- and he has paid tax of Rs.52,000/- (Rs.50,000/- advance tax + Rs.2,000/- TDS). Initially, he was granted refund of Rs.10,000/- after processing the return u/s 143(1). Subsequently, on regular assessment his tax liability was determined at Rs.50,000/- and, hence, his refund was reduced to Rs.2,000/- (i.e., tax liability determined on regular assessment Rs.50,000/- and tax paid by him Rs.52,000/-, hence, revised refund will come to Rs.2,000).
It can be observed that originally he was granted refund of Rs.10,000/- but on regular assessment his refund was reduced to Rs.2,000. Thus, in this case Mr. Vikas was granted excess refund of Rs.8,000/- (i.e., Rs.10,000 – Rs.2,000). He will be liable to repay the excess refund received earlier along with interest u/s 234D.
Refund of Rs.10,000/- was granted on 15^th January, 2023 and regular assessment was completed on 29^th August, 2023, hence, interest u/s 234D will be levied @ ½ % per month from 15^th January, 2023 to 29^th August, 2023, i.e., 8 months (part of the month will be taken as full month).
 
EXAMPLE-4
Mr. Prakash filed his ITR declaring a refund of Rs.92,000. His return was processed u/s 143(1) and refund was granted to him. Subsequently, his case was selected for scrutiny u/s 143(3) and a regular assessment was made u/s 143(3). In the regular assessment his refund was reduced to Rs.50,000.
In this case initial refund of Rs.92,000/- was granted after processing the return u/s 143(1) and, subsequently, the refund was reduced to Rs.50,000. Hence, in this case Mr. Prakash has got excess refund of Rs.84,000. He will be liable to pay interest u/s 234D on the excess refund of Rs.84,000. In other words, he was originally granted refund of Rs.92,000/- and, subsequently, the refund was reduced to Rs.50,000, hence, excess refund will come to Rs.42,000/- and interest will be levied on excess refund of Rs.42,000.