ITR Refund Delays for AY 2025-26: New Rules and Past Assessments Explained
As the Income Tax Return (ITR) filing season for Assessment Year (AY) 2025-26 gains momentum, taxpayers across India are facing an unexpected hurdle: delayed tax refunds. With over 1.05 crore ITRs filed and 95% verified as of July 8, 2025, the Income Tax Department (ITD) has processed approximately 63 lakh returns. However, a new rule under Section 245 of the Income Tax Act is causing significant delays, particularly for honest and salaried taxpayers who rely on timely refunds for financial planning. This blog delves into the reasons behind these delays, the impact of new rule changes, and expert advice on navigating the process, drawing insights from tax professionals and recent updates.
Why Are ITR Refunds for AY 2025-26 Delayed?
The primary reason for the delay in ITR refunds for AY 2025-26 is the ITD’s increased scrutiny under Section 245, which allows the department to withhold refunds until past assessments or outstanding tax demands are resolved. This provision enables the ITD to adjust refunds against any dues from previous years, ensuring compliance but inadvertently affecting taxpayers with clean records. According to experts, this rigorous verification process is part of a broader strategy to curb fraudulent refund claims, but it has led to administrative bottlenecks that frustrate honest filers.
The filing season itself started late, with ITR forms and utilities released by the end of May 2025 due to technical upgrades and changes in the tax system. This delay, combined with the late submission of TDS data by employers and banks (by May 31, 2025), has slowed down the processing of returns. Additionally, the absence of ITR-2 and ITR-3 utilities until recently has impacted taxpayers with complex financial profiles, such as those with capital gains or multiple income sources, further contributing to refund delays.
New Rule Changes and Their Impact
The Finance Act 2024 introduced significant changes that affect ITR filing for AY 2025-26. One key amendment is under Section 115BAC, which makes the new tax regime the default for individuals, HUFs, AOPs (excluding co-operative societies), BOIs, and artificial juridical persons. Taxpayers can opt for the old regime, which allows deductions and exemptions, but must do so explicitly in their ITR by the extended deadline of September 15, 2025. This shift has added complexity, as taxpayers need to ensure their choice aligns with their financial situation to avoid mismatches that could trigger scrutiny.
Another notable change is the extended timeline for filing updated returns (ITR-U) under Section 139(8A), now set at four years from the end of the relevant assessment year, effective April 2025. This allows taxpayers to correct errors or omissions in past returns but does not permit claiming refunds through ITR-U, which could complicate matters for those expecting adjustments. Additionally, the ITD’s use of AI-based systems, such as Project Insight, to flag discrepancies in Form 26AS, AIS, or claimed deductions has led to increased automated verifications, often delaying refunds even for minor errors.
Dinkar Sharma, Company Secretary and Partner at Jotwani Associates, highlights the issue: “Taxpayers who file returns timely, report all income, and respond to notices may find their refunds delayed because of administrative inefficiencies. This may lead them to feel punitive, particularly when there are no outstanding issues or pending notices against them.”
How to Check Your ITR Refund Status
Taxpayers can monitor their refund status through the following steps:
- Income Tax e-Filing Portal: Log in using your PAN and password, navigate to ‘View Filed Returns,’ select AY 2025-26, and check the status. If it shows “Return is under verification,” your refund is on hold pending review.
- NSDL Refund Status Portal: Enter your PAN to view the current status.
- Look for Notices: Check for any ITD communications requesting clarifications or additional information.
If your refund is delayed beyond 90 days, you can file a grievance via the e-filing portal or contact your Assessing Officer. Ensure your bank account details are pre-validated, as an inoperative PAN or unvalidated account can further delay refunds.
Expert Recommendations to Mitigate Delays
Tax experts have proposed several measures to address the refund delays and improve the process:
- Identify Low-Risk Taxpayers: The ITD should prioritize issuing refunds to taxpayers with no pending assessments or mismatches to reduce unnecessary delays.
- Transparent Communication: Clear updates on why refunds are delayed and expected processing timelines would reduce taxpayer anxiety.
- Partial Refunds: Withhold only disputed amounts instead of the entire refund to ease financial strain on honest taxpayers.
- AI Optimization: Refine AI-based systems to minimize false flags on legitimate returns, reducing manual review delays.
- File Early and Accurately: Taxpayers should file ITRs after June 15, 2025, to ensure AIS and Form 26AS data are updated, minimizing discrepancies. Double-check bank details and respond promptly to ITD notices.
CA Suresh Surana advises, “Taxpayers should keep checking the processing status and ensure all details match AIS and Form 26AS. If a notice was received in previous years, verify its status to avoid delays.”
Implications for Taxpayers
The delays are particularly challenging for salaried taxpayers and small depositors who rely on refunds for liquidity. The extended ITR filing deadline to September 15, 2025, provides relief, but late filers may still face penalties under Section 234F (Rs. 1,000 for income up to Rs. 5 lakh, Rs. 5,000 for higher incomes) and interest under Sections 234A, 234B, or 234C for unpaid taxes. Importantly, interest on refunds under Section 244A will be calculated from April 1, 2025, even for returns filed by the extended deadline, ensuring no loss of interest for compliant taxpayers.
However, the lack of transparency in the verification process has sparked criticism. A senior tax consultant noted, “The IT department should create a transparent and clarifying system, so that taxpayers can know why their refund is stuck and in how many days processing can be expected.” This sentiment is echoed across social media, with posts on X expressing frustration over withheld refunds for AY 2025-26 due to ongoing reviews of past returns.
Conclusion
The ITR refund delays for AY 2025-26 stem from a combination of new rules under Section 245, technical delays in form releases, and increased scrutiny to curb fraudulent claims. While these measures aim to ensure compliance, they have inadvertently burdened honest taxpayers, particularly those who file accurately and on time. By checking refund status regularly, ensuring data accuracy, and responding promptly to ITD notices, taxpayers can mitigate some delays. Meanwhile, experts urge the ITD to streamline processes, enhance transparency, and prioritize low-risk filers to restore trust in the tax administration. As Sharma aptly stated, “A trustworthy and transparent tax administration is the cornerstone of a compliant society.”
For the latest updates, visit the Income Tax e-Filing Portal or contact the Aaykar Sampark Kendra at 1800-180-1961. File your ITR accurately and stay proactive to ensure a smoother refund process.
Sources: The Financial Express, Business Today, ClearTax, Tax2win, Economic Times, Income Tax Department
Posted on July 9, 2025
