Income tax refund rules change from April 2026: Check these 2 important updates for Tax Year 2026-27

The original Finance Bill, 2026 introduced in Budget 2026, stated that all interest on tax refunds and defaults relating to Tax Year 2025-2026 and prior years will be computed under the new Income Tax Act, 2025 from April 1, 2026.

However, this raises a practical concerns that both the old and new provisions of the 1961 Tax Act and 2025 Tax Act would need to be referenced at the same time when calculating interest for previous years, which could lead to interpretational and compliance challenges.

To clear up this confusion and help taxpayers, the Finance Act 2026, which was recently approved by the parliament, eliminated this setup and streamlined the interest calculation and provided flexibility in income tax refund adjustments.


According to RSM India, the Finance Act, 2026 has revised Section 536(2)(g) of the Income Tax Act, 2025 to provide that for Tax Year 2025–26 and previous years, the relevant provisions of the Income Tax Act, 1961 will continue to apply for computing interest.

However, the rate of interest applicable on or after April 1, 2026 will be governed by the Income Tax Act, 2025. This ensures a clear demarcation between applicability of provisions and rates, thereby simplifying computation and avoiding dual referencing. The amendment is effective from April 1, 2026 and applies from Tax Year 2026–27 onwards.

Set-off and withholding of tax refunds across the old and new income tax Acts

Under the existing framework of both the Income Tax Act, 1961 and the Income Tax Act, 2025, the tax refund setoff is permitted only against amounts payable under the respective Act.

This created a limitation in situations where:

• A tax refund arises under one Act (either 2025 or 1961); and
• A demand is outstanding under the other Act, resulting in inability to cross-adjust such amounts.

The Finance Act, 2026 provides that tax refunds due under either the Income Tax Act, 1961 or the Income Tax Act, 2025, may be set off against any amount payable under either of the Acts.

This enables cross-utilisation of refunds and demands across both legislations, helping to improve administrative efficiency and reduce taxpayer hardship.

The amendment is made in both the Income Tax Act, 1961 and the Income Tax Act, 2025. The amendment takes effect from March 30, 2026 for the Income Tax Act, 1961; and from April 1, 2026 for the Income Tax Act, 2025.

The Finance Bill, 2026 was introduced in the Lok Sabha on February 1, 2026 which proposed amendments to both the Income-tax Act, 1961 and the Income-tax Act, 2025. On March 25, 2026, the Lok Sabha passed the revised Finance Bill 2026 with over 30 amendments pertaining to the Income Tax Law and the Indirect tax laws such as Customs and Goods and Services tax (GST).

The Finance Act 2026 received the assent of the President on March 30, 2026.