Are you afraid that you have paid more taxes or your employer has deducted more tax at source than you were eligible for?

Did not know what to do in such circumstances? Well, don't worry. Here's how you can claim the refund of excess taxes paid.

Read the most frequently asked questions related to tax refunds and relax.

What is a tax refund?

Tax refund is the amount, which the government gives back to a taxpayer who has paid excess taxes.

How does a tax refund arise?

As mentioned earlier, tax refund arises due to excess payment of taxes to the government.

From a salaried individual's point of view, tax refund generally arises when the employer deducts excess taxes from his salary.

How to claim tax refund?

You need to file an income tax return to claim your tax refund. The amount of refund receivable is computed and shown in the tax return.

Am I eligible for interest on my tax refund?

If the amount of refund is more than 10 per cent of the total tax payable for that particular year then you are entitled to receive simple interest on your tax refund.

Interest is computed @ 0.5 per cent per month on the amount of refund. The interest is computed from the beginning of the next financial year till the date of grant of the refund.

Let's consider an example:

For financial year 2005-2006 your total tax liability was Rs 60,000.

Tax deducted at source by the employer was Rs 70,000.

Therefore, you have paid more than your tax eligibility and can claim a refund of Rs 10,000.

Since the refund amount is more than 10 per cent of your tax liability {10,000 > (60,000 X 10 per cent)} you would be eligible to receive interest on your tax refund.

Let's say the refund is issued to you in February 2007. Then the total interest on refund would be (10,000 * 0.05 per cent X 11 months) = Rs 550. Therefore, the total amount of refund including interest would be Rs 10,550.

Is the refund taxable?

The amount of refund is not taxable.

However, interest received on tax refund is taxable. In the above instance interest received is Rs 550 and hence only this amount will be taxable.

The rate of tax would be as per your applicable slab rate. You may include it in the taxable income of the year in which such refund is received.

In order to claim tax refund is it necessary that tax return should have been filed within the due date?

No.

You can claim tax refund even if you have filed a belated tax return.

• File your returns by July 31

Belated tax return is the one that is filed after the due date (for salaried individuals the due date for filing tax return is the last day of July) but before the expiry of one year from the end of the relevant assessment year.

For example, for the financial year 2005-2006 (starting April 1, 2005 and ending on March 31, 2006), the due date for filing tax return would have been 31st July 2006.

The assessment year relating the financial year 2005-2006 is 2006-2007. Therefore, the belated return can be filed after 31st July 2006 but before 31st March 2008.

Generally, how long does it take to receive the refund?

Well, it would depend on a lot of factors such as the amount of refund, time of return filing (generally, the earlier you file your tax return, the earlier you receive your refund), etc.

One of the other important factors is jurisdiction.

If there were a change in jurisdiction then it would take much longer to process your tax return.

For example, if you had filed your tax return for financial year 2004-2005 in Chennai and for financial year 2005-2006, wherein you are claiming tax refund, you file your return in Pune then it would take longer for you to receive your refund.

The reason for the same is that your PAN (permanent account number) has to be migrated from Chennai to Pune.

Unless the migration is done the tax officer in Pune cannot process your tax return. At times the process of PAN migration takes many months resulting in delays in tax refunds.

• When and how can I claim my refund?

Therefore, it is generally advisable that if you are claiming tax refund then to the extent possible you should file your tax return in the same ward/circle where you filed your last year's tax return.

What to do if you do not receive your tax refund?

If you do not receive your tax refund within a reasonable time (Reasonable time may vary from case to case. However, in general, reasonably you should expect to receive the refund within a maximum of one year from the date of filing the tax return) you can either visit the tax department's office for the follow up of the refund or you can write a letter (along with the copy of acknowledgement of the tax return) to the concerned Income Tax Officer.

If it is still not redressed then you may write a letter to the jurisdictional Chief Commissioner of the Income Tax with a copy to the Grievance Cell and the concerned Income Tax Officer. This letter may be accompanied by the copies of previous letter/s written to the Income Tax Officer and a copy of the tax return filed.

How is the refund received?

In some metro cities the tax department has started ECS facility for direct credit of refund amount to the assessee's bank account. 

In other places, the tax department mails you the refund order, which is similar to a cheque. To prevent misappropriation of your refund, your bank account number as mentioned in your tax return form is written over the refund order.

You need to sign on the back of the refund order when you deposit the same in your bank account.

I am claiming a tax refund while filing my tax return. Is it something to cheer about?

Frankly, there is nothing to cheer about.

In most cases, tax refunds arise due to lack of tax planning or poor tax planning.

• How to avoid tax inquiries 

As mentioned earlier, tax refund is the refund of excess taxes, which you have already paid to the government. So the tax refund is like getting your own money back after a few months or sometimes after many months.

At times the refund gets stuck for some or the other reasons. Then you need to follow up for the refund with the tax department. Claiming high amount of tax refund may also increase the chances of getting your return selected for scrutiny assessment.

Thus, claiming tax refund is no great news. You lose on 'time value of money' and at times have to go through the hassles of following up for refunds or at times face scrutiny assessment.

What can I do to avoid claiming tax refund? (From a salaried individual's point of view)

• Identify all the tax benefits, which you are entitled to. In most cases, such benefits would include house rent allowance exemption, LTA exemption, medical reimbursement exemption, tax benefits on housing loan, deduction on payment of registration fees and stamp duty for purchase of house, other tax saving investments (such as PF, PPF, ELSS, Life Insurance, children tuition fees etc.) deduction for handicapped dependents, deduction on payment of mediclaim insurance premium, deduction on payment of interest on education loan, etc.
• File your tax declarations mentioning all the tax benefits you are entitled to, to claim with the Payroll department of your company soon after the start of the year.
• If you do not file tax declaration the Payroll may deduct taxes as if you are not eligible to claim any tax benefits and this would then result into excess deduction of taxes.
• Filing tax declaration ensures that Payroll would deduct taxes only after considering the tax benefits for which you have claimed in the tax declaration form.
• Submit proofs for all the tax benefits claimed within the due date declared by your Payroll department. These proofs may include medical bills for claiming medical reimbursement exemption, rent receipts for claiming HRA exemption, LTA bills/tickets for claiming LTA exemption, receipts for tax saving investments, tax certificate issued by housing finance companies, etc.

If you happen to change your job in between the year make sure that you submit these proofs, especially rent receipts, LTA bills/tickets and medical bills, to the Payroll before leaving the company.

If you do not submit the proofs then the employer will deduct excess taxes, which you will have to claim as refund at the time of filing your tax returns.

ADROIT is a Pune-based firm that specialises in providing tax and investment services to individuals including non-residents. They can be reached at tax@adroitservices.in.