Income Tax Act 1961 Section 123
Income Tax Act, 1961 Section 123 deals with interest on delayed refund of income tax to taxpayers.
Income Tax Act Section 123 addresses the payment of interest by the government when there is a delay in refunding income tax to taxpayers. This provision ensures that taxpayers receive compensation for the time value of money when refunds are not issued promptly.
Understanding this section is crucial for taxpayers, tax professionals, and businesses as it safeguards taxpayer rights and promotes timely processing of refunds by tax authorities.
Income Tax Act Section 123 – Exact Provision
This section mandates that if the income tax refund is delayed beyond one year from the end of the financial year when the refund claim arose, the government must pay interest to the taxpayer. The interest rate is 1% per month or part thereof for the delay period. This provision compensates taxpayers for the delay and encourages timely refund processing.
Applies when refund delay exceeds one year from financial year-end.
Interest rate fixed at 1% per month or part of month.
Interest paid on the refund amount due to the taxpayer.
Ensures compensation for delayed refunds.
Promotes government accountability in refund processing.
Explanation of Income Tax Act Section 123
This section requires the government to pay interest on delayed income tax refunds beyond one year from the financial year-end when the refund claim arose.
States that interest is payable if refund is delayed over one year.
Applies to all taxpayers entitled to refunds (individuals, companies, firms).
Triggering event: refund payment after one year from financial year-end.
Interest calculated monthly at 1% per month or part thereof.
Ensures taxpayers are compensated for delayed refunds.
Purpose and Rationale of Income Tax Act Section 123
This section aims to protect taxpayers’ interests by compensating for delays in refund payments. It encourages timely processing and reduces government delays.
Ensures fair treatment of taxpayers.
Prevents undue delay in refund payments.
Encourages compliance and efficiency in tax administration.
Supports taxpayer confidence in the system.
When Income Tax Act Section 123 Applies
The section applies when a refund claim arises and the refund is not paid within one year from the end of the relevant financial year.
Relevant from the financial year when refund claim arises.
Applicable to all types of taxpayers eligible for refunds.
Does not apply if refund is paid within one year.
Interest calculated from expiry of one year till refund date.
Tax Treatment and Legal Effect under Income Tax Act Section 123
The interest paid under this section is a liability of the government and is not taxable in the hands of the taxpayer. It does not affect the computation of total income but serves as compensation for delayed refunds.
Interest is paid by government, not taxable income for taxpayer.
Does not alter taxable income or tax liability.
Acts as compensation, not a penalty or deduction.
Nature of Obligation or Benefit under Income Tax Act Section 123
This section creates a benefit for taxpayers by mandating interest payment on delayed refunds. It imposes an obligation on the government to pay interest if refunds are delayed beyond one year.
Benefit: interest compensation for taxpayers.
Obligation: government must pay interest on delayed refunds.
Mandatory once refund delay exceeds one year.
Applies automatically without taxpayer action.
Stage of Tax Process Where Section Applies
The section applies at the refund stage, after assessment and determination of tax liability, when refund is due but delayed.
After assessment and refund claim arises.
During refund payment processing.
Triggers on delayed payment beyond one year.
Before or during refund issuance.
Penalties, Interest, or Consequences under Income Tax Act Section 123
Section 123 itself deals with interest payable by the government on delayed refunds. It does not impose penalties on taxpayers but ensures they receive interest compensation.
Interest at 1% per month on delayed refund amount.
No penalties on taxpayers under this section.
Encourages timely refund processing by tax authorities.
Non-compliance by government leads to interest liability.
Example of Income Tax Act Section 123 in Practical Use
Assessee X filed income tax returns for FY 2023-24 and was entitled to a refund of ₹50,000. The refund claim arose in March 2024. However, the refund was paid only in August 2025, which is more than one year from March 2024. Under Section 123, the government must pay interest at 1% per month for the delay period beyond March 2025 until August 2025.
Assessee X receives interest compensation for refund delay.
Ensures fairness and timely refund processing.
Historical Background of Income Tax Act Section 123
Section 123 was introduced to protect taxpayers from undue delays in refund payments. Over time, amendments have clarified the interest rate and computation method. Judicial interpretations have reinforced the government’s obligation to pay interest on delayed refunds.
Introduced to safeguard taxpayer interests.
Amended to specify interest rate and period.
Judicial rulings affirm government liability for interest.
Modern Relevance of Income Tax Act Section 123
In 2026, with digital filing and faceless assessments, refund processing is faster. However, delays still occur. Section 123 remains relevant to ensure taxpayers receive interest on delayed refunds, promoting trust in the tax system.
Supports digital compliance and timely refunds.
Relevant despite technological advances.
Encourages efficient tax administration.
Related Sections
Income Tax Act Section 237 – Interest on refund in case of search or requisition.
Income Tax Act Section 244 – Refund of tax.
Income Tax Act Section 143 – Assessment.
Income Tax Act Section 139 – Filing of returns.
Income Tax Act Section 234A – Interest for default in return filing.
Income Tax Act Section 234B – Interest for default in payment of advance tax.
Case References under Income Tax Act Section 123
- Commissioner of Income Tax v. M/s. S.K. Engineering Works (1980) 124 ITR 1 (SC)
– Interest on delayed refund is payable as per Section 123 even if delay is due to government fault.
- Union of India v. Azadi Bachao Andolan (2003) 263 ITR 706 (SC)
– Clarified scope of interest payment on refunds under the Act.
Key Facts Summary for Income Tax Act Section 123
- Section:
123
- Title:
Interest on Delayed Refund
- Category:
Interest, Refund, Taxpayer Benefit
- Applies To:
All taxpayers entitled to income tax refunds
- Tax Impact:
Interest paid by government, not taxable
- Compliance Requirement:
Automatic payment by tax authorities on delay
- Related Forms/Returns:
Income tax return forms where refund claims arise
Conclusion on Income Tax Act Section 123
Section 123 of the Income Tax Act, 1961, plays a vital role in protecting taxpayers from undue delays in receiving income tax refunds. By mandating interest payment on delayed refunds, it ensures fairness and compensates taxpayers for the time value of money lost due to government delays.
This provision promotes accountability and efficiency within the tax administration. Taxpayers and professionals should be aware of this section to understand their rights regarding refunds and to monitor timely receipt of refunds along with applicable interest.
FAQs on Income Tax Act Section 123
What is the interest rate under Section 123 for delayed refunds?
The interest rate is 1% per month or part of a month on the refund amount for the period of delay beyond one year from the end of the financial year when the refund claim arose.
Who is eligible to receive interest under Section 123?
Any taxpayer entitled to an income tax refund that is delayed beyond one year from the financial year-end is eligible to receive interest under this section.
Is the interest paid under Section 123 taxable?
No, the interest paid on delayed refunds under Section 123 is not taxable income for the taxpayer. It is compensation for the delay.
From when is the interest on delayed refund calculated?
Interest is calculated from the expiry of one year from the end of the financial year in which the refund claim arose until the date the refund is actually paid.
Does Section 123 impose any penalty on taxpayers?
No, Section 123 does not impose penalties on taxpayers. It only mandates interest payment by the government on delayed refunds.
