As Budget 2026 approaches, one issue has emerged as a major talking point among taxpayers and tax experts alike — parity in interest rates on income tax refunds and unpaid tax dues. The demand has gained urgency this year amid widespread refund delays, which have left millions of taxpayers waiting for money that is rightfully theirs.
Refund delays fuel taxpayer frustration
This year, refund delays have been one of the most discussed pain points among taxpayers. Data suggests that around 50 lakh taxpayers are still awaiting processing of their income tax refunds, and a large section of them is expecting refunds to be credited. For salaried individuals and small taxpayers, these refunds are often planned into household cash flows, making delays particularly stressful.
The government too acknowledged the delay in refunds in some cases for AY 2025–26, citing multiple reasons. These include enhanced backend checks to curb fraudulent claims, verification of AIS and TIS data, and increased scrutiny to prevent incorrect deductions and inflated refund claims. While these steps are aimed at improving compliance and protecting revenue, taxpayers argue that prolonged delays should come with fair compensation.
The imbalance in current interest rules
At the heart of the debate lies the unequal interest rate structure under the Income Tax Act. At present, taxpayers pay a significantly higher rate of interest to the government for delays, while receiving a much lower rate when refunds are delayed.
Explaining this gap, CA Dr. Suresh Surana said: “Currently, the IT Act provides for different rates for interest payable by taxpayers on delayed payment of taxes and interest payable by the tax authorities on delayed refunds While taxpayers are required to pay interest at 1% per month (12% per annum) under Sections 234A, 234B and 234C of the IT Act for defaults in filing returns, advance tax and self-assessment tax, the interest granted on delayed refunds under Section 244A is restricted to 0.5% per month (6% per annum). Budget 2026 presents an opportunity to rationalise the interest rates paid vis-à-vis collected by the government.”
What the law currently says
Under Section 244A, the tax department pays 6% per annum (0.5% per month) as simple interest on income tax refunds. This interest is applicable only if the refund amount exceeds 10% of the total tax liability. If the return is filed on time, interest is calculated from 1 April of the assessment year until the date the refund is granted. If the return is filed late, interest runs from the date of filing.
Importantly, interest received on refunds is taxable in the hands of the taxpayer.
In contrast, interest on unpaid taxes under Sections 234A, 234B and 234C is charged at 1% per month (12% per annum). This applies to delays in filing returns, shortfall in advance tax, or deferment of advance tax instalments. Unlike refund interest, this interest cannot be claimed as a deduction.
Why parity matters in Budget 2026
Tax experts argue that this asymmetric structure favours the government and places a heavier burden on compliant taxpayers, especially in years when refunds are delayed due to systemic or administrative reasons. With refunds taking longer despite timely filing, the demand for equal interest on refunds and tax dues is being seen as a matter of fairness rather than a concession.
As Budget 2026 is expected to focus on taxpayer trust, ease of compliance, and system efficiency, many believe it presents a timely opportunity for the government to rationalise interest rates and send a strong signal that delays affect both sides equally. For millions waiting on refunds, such a move could restore confidence and ease cash-flow pressures in a year already marked by uncertainty.