The refund is yours, the interest is income
There are two parts to a refund, and they are taxed differently. The first part is the excess tax you paid coming back to you, and that is not income at all, it is your own money returned. The second part is the interest the department adds for having held your money, paid under Section 244A at half a per cent a month, and that interest is income. It is taxable in your hands under Income from Other Sources, in the year you receive or are granted the refund, and it goes in the other-sources schedule of your return.
This is one of the most commonly missed items, because people think of the whole refund as simply getting their money back. For an NRI it matters twice over. The interest is Indian-source income, so it is taxable here, and it is visible: it appears in your AIS and your 26AS as interest credited, so the department already knows about it. If your return does not include it, the numbers do not match, and a mismatch notice is a common result.
No one deducts tax on it, so report it yourself
The practical trap is that refund interest does not arrive with tax already taken off. Unlike interest from a bank, where the payer deducts TDS, the tax department does not deduct any tax on the interest it pays you on a refund. So it reaches you in full, and the responsibility to declare it and pay tax on it is entirely yours. For an NRI who assumes anything taxable would have had tax deducted, this is exactly the kind of item that slips through. The fix is simple: pick up the 244A interest figure from your AIS or the refund order, and include it as other-sources income on your return.
One related point. If a refund you received is later reduced, on a rectification or a fresh assessment, the department takes back the excess, and it charges you interest on that excess under Section 234D, again at half a per cent a month. Under the Income-tax Act, 2025 the refund-interest provision is renumbered to Section 437 from FY 2026-27, but for now it is Section 244A. A practising CA picks up the refund interest correctly, reports it, and keeps your return matched to your AIS so no mismatch notice follows.