Delays in Income Tax Refunds: Understanding the Current Scenario
The ITR (income tax return) filing season for AY 2025-26 concluded on September 16, 2023, with no further extensions granted. This season experienced two notable extensions: an initial period of 46 days from August 1 to September 15, followed by an additional 24-hour extension until midnight on September 16. As of September 23, approximately 7.59 crore taxpayers had successfully filed their returns, but around 2.5 crore income tax returns still await processing by the Income Tax Department, despite about 5.09 crore returns having been processed.
Many taxpayers have taken to social media platforms to express their frustration regarding delays of 2 to 3 months in receiving their refunds. Some reported that they filed their returns in mid-June but have yet to see any progress on the processing of their claims. The delays can be attributed to several factors, one of which is the increased scrutiny that the Income Tax Department is applying to returns filed under the old tax regime, especially those claiming inflated deductions and exemptions.
Reasons Behind the Delays
Experts indicate that the Income Tax Department has ramped up its scrutiny efforts. There has been a noticeable surge in fraudulent exemption claims, prompting the department to implement additional layers of risk assessment at the Central Processing Centre to prevent wrongful refund payments.
The Income Tax Act of 1961, specifically Section 245, permits the department to adjust or withhold refunds in cases of outstanding demands or when further verification of returns is necessary. Taxpayers who have previously claimed excessive deductions—often lacking proper documentation—may find their refunds delayed until all assessments are completed.
Dinkar Sharma, Company Secretary and Partner at Jotwani Associates, explains that this approach reflects a targeted compliance strategy rather than an arbitrary measure. “The department employs data analytics and AI systems to identify patterns of inflated or suspicious claims. Once flagged, these cases undergo review, and refunds are only released after facts are reconciled,” he noted. Genuine taxpayers with substantiated deductions need not worry, as their refunds are expected to be issued once the verification is complete.
Large-Scale Verification Campaign
In July, the Income Tax Department initiated a significant verification campaign, taking action against individuals and entities filing income tax returns with fraudulent claims. Investigations revealed that some ITR preparers were participating in organized rackets, misleading taxpayers about their eligibility for deductions and exemptions, often promising hefty refunds in exchange for commissions.
Utilizing financial data from third-party sources and advanced artificial intelligence tools, the department has been aggressively pursuing fraudulent claims. According to Deepashree Shetty, Partner at BDO India, the CBDT has launched several awareness initiatives aimed at educating employees and taxpayers on properly claiming deductions and exemptions.
Despite the reduction in refund processing time over the past few years, an increase in wrongful deduction claims necessitated a meticulous verification process for returns with large refund claims. The CBDT has focused its attention on taxpayers opting for the old tax regime, where claims for various expenses such as rent and medical expenses have been under increased scrutiny.
Heightened Oversight of Refunds
Vivek Jalan, Partner at Tax Connect Advisory Services LLP, remarks that this year’s strict monitoring of ITR exemption claims reflects a clear indication of policy change by the CBDT. Due to rigorous disclosures and screening, non-corporate refunds have dropped significantly year-over-year, from Rs 1.01 lakh crore to Rs 0.37 lakh crore.
In particular, cases involving taxpayers who previously claimed deductions under Section 80GGC for donations exceeding Rs 5 lakh have drawn scrutiny, especially if the recipient parties lacked credibility. Such histories of false claims mean that recent applications from these taxpayers are also carefully reviewed, causing further delays in refunds.
Taxpayers who maintain adequate proof, such as acknowledgement receipts, exemption certificates, and transaction records, can expect their refunds to be cleared more swiftly. The CBDT’s vigilant approach ensures that refunds for non-corporate taxpayers, particularly those with previous suspicious claims, undergo thorough investigation before release.
In conclusion, while the delays in income tax refunds may cause temporary inconvenience for some, the ongoing scrutiny and verification efforts aim to reinforce compliance and uphold the integrity of the tax system.
