Interest earned on tax refund is taxable

iStockPhotoBe it because of poor financial planning or poor tax planning, one may end paying more tax than what’s needed. Employers usually ask employees to declare the amount of tax-saving investments planned for the year at the beginning of the year to ensure that appropriate tax is deducted every month. However, this could be tricky and some people may end up under-reporting the amount. This leads to over-taxation and the person becomes eligible for a tax refund. The refund amount, under certain circumstances, becomes eligible for interest, and this interest is taxable. When does a refund earn interest? If the amount of refund is at least 10% of the actual tax liability before tax deducted at source (TDS), then the refund is eligible for simple interest. For example, the actual liability was Rs.50,000 but a total of Rs.75,000 was paid as tax. In this case, the excess tax paid Rs.75,000-Rs.50,000

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