Received Excess Income Tax Refund? Why Did This Happen And What You Can Do?

Taxpayers may get excess income tax refunds for various reasons; if that happens, here's what they should do to avoid penalties and legal hassles later.
Received Excess Income Tax Refund? Why Did This Happen And What You Can Do?
Received Excess Income Tax Refund? Why Did This Happen And What You Can Do?

If you have received an excess income tax refund (ITR), it means the tax authorities have refunded you more than you owed.

"Taxpayers can get an excess refund in a situation where their original ITR was a refund ITR and the return was processed and refund due was also credited subsequently, they have filed a revised ITR and reported any missed out income which results in the revised ITR becoming a tax payable ITR. Thus, the refund claimed in the original ITR is now a case of excess refund, which shall be paid back to the government," says Archit Gupta, founder and CEO of Clear, a tax portal.

The case of excess ITR could happen due to several reasons. Here are a few of them:

Errors In Tax Calculation: There could have been errors or discrepancies in the tax calculations, either by you or the tax authorities.

Claiming Deductions And Exemptions: You might have claimed deductions or exemptions that were not eligible, leading to an overestimation of the refund. "You claimed deductions or exemptions that you were not eligible for. This is a common reason for getting an excess refund. For example, you may have claimed a deduction for medical expenses that you did not incur, or you may have claimed an exemption for dependents you are not supporting," says Sanjiv Bajaj, joint chairman and managing director (MD), Bajaj Capital.

Incorrect TDS Deduction: Your employer or other parties might have deducted more Tax Deducted at Source (TDS) than necessary, resulting in a higher refund.

Amendments In Return: If you filed an amended return and claimed additional deductions or exemptions, this could lead to a higher refund.

Mismatch In Data: There could be a mismatch between the data you provided in your tax return and those available with the tax authorities.

Processing Errors: Mistakes in processing your tax return by the tax department could result in an excessive refund.

Technical Glitches: Sometimes, technical glitches in the tax filing system can lead to errors in refund calculations.

If you receive an excess income tax refund, it's essential to take the following steps:

Review Your Return: Double-check your tax return to ensure that all the information provided is accurate and matches your actual financial situation.

Contact Tax Authorities: If you believe there's been a mistake in the refund calculation, you should contact the ITD to rectify the situation.

Wait For Intimation: The tax authorities might send you an intimation explaining the reason for the excess refund. This will provide you with information on what action you need to take.

Avoid Spending: It's advisable not to spend the excess refund immediately, as you might need to return it if the tax authorities find an error and request you to do so.

Keep Records: Maintain all documentation related to your income, deductions, and tax calculations. These documents will be helpful in case you need to provide proof of your claims.

File Corrective Returns: If the tax authorities request you to file a corrected return, do so promptly.

Future Planning: Use this situation as a reminder to be cautious and accurate while preparing your tax return in the future. Double-check your calculations and consult with tax professionals if needed.

Remember that even if you receive an excess refund, you must ensure that your tax return is accurate and complies with the tax laws. If there is a mistake, rectify it promptly to avoid legal or financial complications later.

Here are the steps on how to file a revised income tax return to pay back an excess income tax refund:

Go to the ITD website and log in to your account.

Click on the "File Returns" tab.

Select the "Revised Return" option.

Enter your PAN number and the assessment year for which you are filing the revised return.

Enter the details of the excess income tax refund that you received.

Submit the revised return.

The ITD will process the revised return and send you a refund if you are due one.

It is important to note that if the taxpayer does not file a revised income tax return to pay back the excess income tax refund, they may be subject to penalties and interest charges.

What Happens If The Excess Refund Is Not Paid?

If the excess income tax refund is not paid, the ITD may take the following actions:

Send a notice asking the taxpayer to pay back the excess amount with interest. The interest rate is 0.5 per cent per month.

Levy Penalties On The Taxpayer. The penalties can be up to 200 per cent of the excess amount.

Initiate Legal Proceedings Against The Taxpayer. "This could result in a court order to repay the excess amount, plus interest and penalties. The ITD may also take other actions, such as suspending the taxpayer's PAN card or freezing their bank account," says Bajaj.

According to experts, the assessee should pay back the excess amount as soon as possible. Section 270A(2) provides that a person shall be considered to have under-reported his income if the income assessed is greater than the income determined in the return processed under section 143(1) and shall be liable for a penalty of 50 per cent of tax payable amount on such under-reported income.

“However, it is possible that the assessee has omitted certain taxable incomes or has claimed excess deductions while filing a return to receive a tax refund, and if the department, on scrutiny, becomes aware of such fact, it may treat the same as misreporting of income since misrepresentation or suppression of facts or claim of expenditure not substantiated by evidence is misreporting of income under section 270A, and penalty @ 200 per cent of tax payable on such income shall be levied,” says Divakar Vijayasarathy, founder and CEO of DVS Advisors.

Moreover, if the taxpayer does not pay back the excess IT refund, they may have difficulty getting a loan or credit card. They may also have trouble getting a job or a government contract.

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