It’s always great to get a refund. Be it from your insurance company, income-tax department or a court. But if these refunds are delayed, you are eligible for an interest payment, as well.
Insurance claim delays
The regulator IRDAI has set a limit of 30 days for general insurance companies to settle claims once all the documents are received. In extreme cases, where an investigation is required, an additional 15-day period is granted.
At the end of this 30-45 day period, if the claims still remain outstanding, an interest of 2 percent above the bank rate is supposed to be paid to the insured. The Reserve Bank of India’s bank rate – currently at 4.25 percent – at the start of the financial year is considered for the calculation.
Though the rate of interest payable to the insured for delay in claim settlement remains the same for life insurance, the buffer period differs. Life insurance companies need to pay the fine only if the claim is delayed beyond 270 days.
Income tax refund
The income tax department has expedited refunds significantly over the years. But if you still await your income tax refund, then an interest would be payable to you, thereby expanding your total refund amount.
As per the Income Tax Act, an interest of 0.5 percent is payable on refunds for each month of delay. But when does the clock start ticking for the interest? If excess advance tax or tax deduction at source has been paid (your bank or mutual fund or even your employer can deduct TDS), then the cycle starts from April 1 of the assessment year (a year succeeding the financial year; or the year for which your income is assessed), even if your last date for filing your tax returns is July 31 of the assessment year. The logic here is that the government has been earning income as soon as it gets hold of the TDS deducted. Hence, the refund clock starts ticking from April 1.
If the interest is on additional self-assessment tax, then the interest would be payable from either the tax-payment date or the return filing date (later of the two).
Check the break-up of the refund amount and the interest penalty due to you, in the acknowledgement email that the income-tax department sends you.
Note that this interest is payable only if the refund exceeds 10 percent of the tax paid. If you observe any error in amount of interest received, then you can raise an online rectification request though your tax filing account.
Legal court settlement
When it comes to court battles with insurance companies, consumer goods or real estate firms) an interest penalty can be offered at the discretion of the judge, who declares the rate of interest. As per the Negotiable instruments Act, 1881, the Court may offer interest at 6 percent per annum if no rate of interest has been speciﬁed.
This 6 percent interest rate is the maximum rate of interest for the post-decree stage. For instance, in February the court asked a Bangalore-based builder to pay each flat owner a simple interest of 6 percent per annum on the cost of flat for possession delay of four years. There have been instances of motor vehicle insurance cases stretched for for 30 to 40 years.
Banks and delayed refunds
Ever withdrawn cash from an ATM, not got the cash but money gets debited out of your bank account? There are even instances of online payments failure, even while the bank account shows a debit transaction. Such transactions need to be reversed by the bank or e-commerce company within 6 business days including the date of the transaction.
Here, the interest that is due to you is Rs 100 per day beyond the sixth business day, either by your bank or shopping portal.
Deferment of salary
In this pandemic, it’s not just the private sector firms that have delayed salary payments. Even government departments have been known to delay salaries to their employees. Last month, Supreme Court entitled all such government employees to get their salary and pension with an interest of 6 percent.
Those covered under The Payment of Wages Act, 1936, can approach courts if interest has not been paid on delayed salary, within 12 months from the salary due date. Those who aren’t covered by the Wage Code of Conduct, can check if contract with the employer cover the clause on interest on delayed payments such as salary, pension, gratuity or even retirement benefits.
Taxability of interest penalty
Tax experts that Moneycontrol spoke to say that interest penalty income is taxable. Well, most such interest is taxable.
“Interest received on compensation or enhanced compensation is considered to be his income. Even interest received on income tax refunds is taxable. However, taxes don’t apply to death claims under insurance, which itself is exempt from taxes,” says Sudhir Kaushik, co-founder and CEO of TaxSpanner.com.
Interest received as penalty is taxed under income from other sources, taxable in the year you get it, and at your income-tax rates. But talk to your chartered accountant first, as the laws around taxation of various interest received as penalty are either not listed or have a loophole.
If taxes have been deducted before making a payment to you, where they weren’t supposed to be taxed, then you can claim a refund through your tax returns.