Sections 437 and 438 explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Section 437 gives an assessee simple interest on a refund at 0.5% for every month or part of a month, for a period that depends on how the tax was paid. It also provides additional interest in some appeal cases, a threshold below which no interest is payable, and rules for excluding delay caused by the assessee. Section 438 lets the Assessing Officer set off a refund against a sum payable, and withhold a refund while an assessment is pending. This article follows the text as per the Income-tax Act, 2025 as amended by the Finance Act, 2026. To claim and track a refund, see our income tax return filing service. For the earlier Act's provisions, see our note on where the earlier Act's refund provisions sit in the 2025 Act.
Where a refund is due, the assessee is entitled to simple interest at 0.5% for every month or part of a month, for the period in the Table of section 437(1), unless the refund is less than 10% of the tax determined (rows 1 and 2). Additional interest at 3% per annum can arise when a refund follows an appeal-type order. The Assessing Officer can set off the refund against sums payable after giving written intimation, and can withhold up to sixty days while an assessment or reassessment is pending (section 438, amended by the Finance Act, 2026).
Section 437(1): the rate and the Table
Where a refund is due to the assessee under the Act, he is entitled, in addition to the refund, to simple interest at 0.5% for every month or part of a month, in the circumstances in column B of the Table, for the period in column C.
| Serial number | Circumstances (column B) | Period (column C) |
|---|---|---|
| 1 | Where the refund is out of tax collected at source under section 394, or paid by way of advance tax, or treated as paid under section 390(5), during the financial year | (a) From the first day of April of the year following the tax year to the date on which the refund is granted, where the return of income has been furnished on or before the due date as specified in section 263(1); (b) in any other case, from the date of furnishing the return of income to the date on which the refund is granted |
| 2 | Where the refund is out of any tax paid under section 266 | From the date of furnishing of the return of income or payment of tax, whichever is later, to the date on which the refund is granted |
| 3 | Any other case | From the date, or dates, on and from which the amount of tax or penalty specified in the notice of demand under section 289 is paid in excess of such demand, to the date on which the refund is granted |
Example (amounts and months assumed). Chandni furnishes her return on or before the due date and a refund of Rs. 20,000 arises out of advance tax. Row 1(a) applies: interest runs from 1 April of the year following the tax year to the date of grant. If that is 8 months or part of a month, interest = 0.5% x Rs. 20,000 x 8 = Rs. 800. If she had filed after the due date, row 1(b) would start the period at the date of furnishing the return.
Section 437(2): the 10% threshold
No interest is payable under sub-section (1) (Table: serial number 1 or 2) if the amount of refund is less than 10% of the tax as determined under section 270(1) or on regular assessment. Row 3 is not covered by this threshold.
Example (amounts assumed). Tax determined under section 270(1) is Rs. 2,00,000 and the refund is Rs. 15,000, which is 7.5% of the tax and less than 10%, that is Rs. 20,000. No interest is payable under rows 1 and 2. If the refund were Rs. 20,000 or more, the threshold would not bar interest, since the Act says "less than".
Section 437(3): refund after an application under section 288(1)
Where the refund in row 1 arises from an order of the Assessing Officer on an application by the assessee under section 288(1) (Table: serial number 11), interest is at 0.5% for every month or part of a month from the date of the application to the date the refund is granted.
Section 437(4) and (5): additional interest
In a case where a refund arises from giving effect to an order under section 359, 363, 365(10), 368, 377 or 378, wholly or partly, otherwise than by making a fresh assessment or reassessment, the assessee is entitled to additional interest which is:
- (a) in addition to the interest payable under sub-section (1); and
- (b) computed on the amount of refund at 3% per annum, for the period beginning from the date following the expiry of the time allowed under section 286(1) (Table: serial numbers 9 and 10) to the date the refund is granted.
Under sub-section (5), where assessment or reassessment proceedings are pending, the period from the date on which the refund is withheld under section 438(3) to the date up to which it is withheld is excluded in computing the period for additional interest.
Example (amounts and period assumed). Giving effect to an appeal order produces a refund of Rs. 50,000, and one year passes between the date after the time allowed under section 286(1) expires and the date of the refund. Additional interest = 3% x Rs. 50,000 x 1 year = Rs. 1,500, on top of the interest under sub-section (1).
Section 437(6): refund to a deductor
Where a refund becomes due to a deductor for an amount paid to the credit of the Central Government "under Chapter XIX-B" (the Act's own reference), the deductor is entitled, in addition, to simple interest at 0.5% for every month or part of a month in the period from the date on which:
- (a) the claim for refund is made in the prescribed form; or
- (b) the tax is paid, where the refund arises on giving effect to an order under section 359, 363, 365(10) or 368,
to the date on which the refund is granted. The form of claim is left to the Income-tax Rules, 2026. Our article on sections 431 to 436 explains the refund application of section 434.
Section 437(7) and (8): delay attributable to the assessee
If the proceedings resulting in the refund are delayed for reasons attributable to the assessee or the deductor, wholly or in part, the period of delay so attributable is excluded from the period for which interest is payable. Where a question arises on the period to be excluded, it is decided by the Principal Chief Commissioner, Chief Commissioner, Principal Commissioner or Commissioner, whose decision is final.
Section 437(9) to (11): revision of interest
Where, because of an order under section 270(10), 271, 279, 287, 288, 359, 363, 365(10), 368, 377 or 378, the amount on which interest was payable under sub-section (1) or (3) is increased or reduced, the interest is increased or reduced accordingly. Where interest is reduced, the Assessing Officer serves a notice of demand in the prescribed form, specifying the excess interest paid and requiring payment. That notice is deemed to be a notice under section 289 and the Act applies accordingly. For the assessment under section 270 that often gives rise to the refund, see our post on section 270.
Section 438: set-off and withholding
Section 438 was amended by section 97 of the Finance Act, 2026.
| Sub-section | Rule |
|---|---|
| (1) | Where a refund becomes due or is found to be due to any person under the Act, the Assessing Officer, Commissioner, Principal Commissioner, Chief Commissioner or Principal Chief Commissioner, as the case may be, may, in lieu of payment, set off the amount to be refunded, or any part of it, against the sum, if any, remaining payable under the Income-tax Act, 1961 (43 of 1961) or this Act by such person |
| (2) | Any action under sub-section (1) shall be taken after giving an intimation in writing to the person of the action proposed |
| (3) | Where (a) a part of the refund is set off, or (b) no amount is set off, and a refund becomes due, and proceedings for assessment or reassessment are pending, the Assessing Officer may, for reasons to be recorded in writing and with the previous approval of the Principal Commissioner or the Commissioner, withhold the refund up to sixty days from the date on which the assessment or reassessment is made |
The reference to the 1961 Act in sub-section (1) is quoted as printed; nothing is added about it. Three points of reading. First, set-off is "in lieu of payment": the sum owed is reduced instead of the refund being paid. Second, an intimation in writing must come first. Third, withholding in sub-section (3) needs recorded reasons and previous approval, and runs up to sixty days from the date the assessment or reassessment is made; sub-section (5) of section 437 excludes the withheld period from the additional interest calculation.
Example (amounts assumed). A refund of Rs. 90,000 is due to Jiya Enterprises, while Rs. 35,000 remains payable by it under this Act. After a written intimation, Rs. 35,000 is set off and Rs. 55,000 remains. If an assessment is pending, the Assessing Officer may, for recorded reasons and with approval, withhold the Rs. 55,000 up to sixty days from the date the assessment is made.
Need help with interest on your refund?
Whether interest is due, and from which date, depends on how the tax was paid and when the return was filed. Our income tax return filing team works through the Table, checks the 10% threshold and follows up on set-off intimations.
Key takeaways
- Interest on refunds is simple interest at 0.5% for every month or part of a month, for the period in the Table of section 437(1).
- No interest is payable under rows 1 and 2 where the refund is less than 10% of the tax determined.
- Additional interest at 3% per annum can arise where a refund follows giving effect to certain orders.
- Delay attributable to the assessee or the deductor is excluded from the period.
- A refund can be set off against sums payable after a written intimation, and withheld up to sixty days for pending assessment on recorded reasons and approval.
- Section 438 was amended by section 97 of the Finance Act, 2026.
Read next
- Sections 431 to 436: refunds, who may claim and how
- Section 439: penalty for under-reporting
- Section 423: interest for default in furnishing return of income
- Chapter XX: refunds
Disclaimer: Based on the Income-tax Act, 2025 (30 of 2025) as amended by the Finance Act, 2026, as consulted on 2 October 2026. It explains the words of the Act only; the Income-tax Rules, 2026, notifications, circulars, later amendments and the way the tax authorities and courts apply these provisions should be checked. This article is general information, not legal advice; check the official text before acting.