India’s income-tax refunds declined in FY26, with CBDT data showing refunds of Rs 3.11 lakh crore as of January 11, compared with Rs 3.75 lakh crore in the corresponding year-ago period — a decline of 16.92 percent year-on-year. Senior tax officials said the moderation does not indicate any withholding of refunds but reflects changes in tax deduction patterns, wider adoption of the new income-tax regime, analytics-driven verification of returns, and base effects from last year’s elevated refund payouts.
Officials said the refund moderation reflects a broader transition underway in the tax system. Rationalised Tax Deducted at Source (TDS) provisions, rising adoption of the new income-tax regime, and data-driven compliance interventions are reducing excess tax payments and correcting incorrect claims earlier in the process. In this environment, refund growth is becoming a weaker standalone indicator of administrative efficiency, they said, as tax payments align more closely with final liability.
Analytics-based checks curbed incorrect refund claims
Senior tax officials said refunds were moderated partly because automated data checks flagged mismatches in certain returns, prompting closer scrutiny of claims before refunds were issued. Certain refund claims were flagged as inconsistent through data analysis.
Taxpayers responded to compliance nudges by revising filings.
Officials said nudge campaigns conducted over the past two years yielded an additional tax implication of about Rs 9,640 crore, comprising Rs 8,800 crore from non-foreign-asset compliance interventions and Rs 840 crore linked to foreign income and asset disclosures. Of the Rs 8,800 crore impact, roughly Rs 1,750 crore arose from taxpayers reducing refund claims.
A senior government official cautioned against reading refund trends without accounting for structural changes.
“Refund growth has to be seen in perspective. It cannot be compared mechanically with last year’s numbers because several structural factors are involved,” the official told Moneycontrol.
India’s income-tax refunds recorded negative growth in FY26, with Central Board of Direct Taxes (CBDT) data showing refunds of Rs 3.11 lakh crore as of January 11, compared with Rs 3.75 lakh crore in the corresponding year-ago period — a contraction of 16.92 percent year-on-year.
Refunds were not stopped, officials say
Tax authorities rejected the narrative that refunds were withheld across the board.
More than 95 percent of refund cases have already been processed in FY26. Refunds were held back only for flagged Permanent Account Numbers (PANs) requiring verification.
Officials stressed that refund processing has remained largely uninterrupted.
“Refunds were never stopped across the board. Only cases flagged through data analytics were taken up for verification. It would be incorrect to suggest that refunds are being withheld. If a claim is correct, the system has the capacity to issue refunds within hours or days,” the official added.
TDS rationalisation reduced excess tax deduction
One of the primary drivers of lower refunds was the rationalisation of Tax Deducted at Source (TDS) provisions.
Officials attributed part of the refund moderation to cumulative changes in TDS provisions across successive Finance Acts, particularly after the introduction and rising adoption of the new income-tax regime. Ongoing rationalisation, officials said, has reduced instances of excess tax deduction at source, mechanically lowering refund claims by narrowing prepaid tax mismatches that historically resulted in post-filing refunds. Officials explained that TDS rationalisation is intended to minimise excess deduction at source, thereby reducing the need for post-filing tax refunds.
The senior official said this process has gradually reshaped refund dynamics.
“TDS provisions have been rationalised over time, which has reduced excess tax deduction at source. Naturally, that also brings down refund claims,” the official said.
Officials added that this mechanical effect alone made refund growth appear weaker compared with the previous year.
Shift to the new tax regime changed refund behaviour
A sharp migration of taxpayers to the new income-tax regime also contributed to lower refund claims.
Among taxpayers filing Income-Tax Return forms ITR-1 to ITR-4 – which largely cover salaried individuals, investors, professionals and small businesses – about 88 percent have opted for the new tax regime. The regime removes most deductions and exemptions that earlier inflated refund claims under the old system. As a result, taxpayers are increasingly paying advance tax and TDS closer to final liability instead of overpaying and seeking refunds later.
Officials said the design of the regime itself reduces refund-heavy outcomes.
“Under the new tax regime, taxpayers are paying advance tax and TDS closer to their actual liability. Since most deductions are not available, refund claims as such are lower,” the senior official said.
High base from FY25 distorted comparisons
Refund growth in FY26 was also influenced by a statistical base effect.
FY25 saw elevated refund payouts due to the clearance of long-pending appeal effects and legacy cases, inflating refund figures last year. When compared against that unusually high base, FY26 refund numbers mechanically showed negative growth.
“Refund numbers were elevated last year because of the clearance of appeal effects and pending cases. When you compare against that base, growth naturally appears negative,” the official said.
Officials cautioned that headline comparisons without accounting for such base effects could misrepresent underlying trends.
Digital scrutiny and analytics reshaped refund outcomes
Experts say the tax department’s expanding use of data analytics has further influenced refund trends.
An tax expert said tighter compliance controls and automated checks are increasingly identifying incorrect refund claims.
“The decline in direct tax refunds during FY26 is largely a result of enhanced digital scrutiny and tighter compliance controls within the tax administration,” he told Moneycontrol.
According to him, AI-driven risk assessment tools are detecting irregularities that previously escaped routine processing. “Advanced data analytics and AI-driven risk assessment tools are now identifying large volumes of incorrect or fraudulent refund claims that were earlier processed mechanically,” he said.
Common discrepancies include inflated deduction claims, mismatches in TDS credits, and unsupported exemption entries. “With real-time PAN-Aadhaar linkage, third-party information reporting and improved reconciliation, such claims are now being flagged and disallowed,” he added.
Refund moderation is also consistent with tightening verification trends, another tax expert said. “During FY 2025–26 there has been a sharp reduction in the refunds issued by the tax authorities. The reasons are manifold, including stricter verification of amounts appearing in Form 26AS, instances where refund quantum is disproportionate to income offered, intense scrutiny of deductions claimed by individual taxpayers, higher tax collection targets, and screening for fraudulent refund claims,” he told Moneycontrol.
