A tax refund is the amount paid back to the individual or business whose tax paid or held by the government is higher than the actual tax figure that they are liable for. This amount is calculated annually. This is most often because of a higher withholding tax amount that has been held for a person.

A withholding tax is of two types. One type of withholding tax is the tax on personal income that is held by an employer through the year and then paid to the government. This amount is considered to be paid towards the person’s income tax for the year. The principle behind this is that it is easier to tax the income at source rather than collecting it later. It is found that this withheld amount makes up almost 90% of the total tax paid annually for most people. Each person and business pay their taxes annually. After the tax returns are filed and paid, the person’s actual tax liability is calculated and if the amount that is withheld makes the total tax paid higher than the tax that the individual or business is supposed to pay, the government refunds the amount.

Another form of withholding tax is the one that is applicable to the non-residents of the country who earn any kind of income in the country. The withheld tax is also applicable to dividends and interest that one earns from stocks and securities that are paid to a non-resident of the country or any other income that a non-resident might have.

If the withheld tax amount were calculated and paid correctly there would be absolutely no need for the government to issue refunds as the amount paid would be equal to one’s tax liability. However, most people have no control over the calculation of the withheld tax as that is in the hands of the employer.

The tax refund payout is most often in the form of a bank deposit, checks or bonds. While tax refunds often take a longer time, digitization of the process has resulted in shorter turnaround time. In effect, the system works as a loan from the taxpayers to the government over the course of a year that is returned interest-free.

In some cases, tax refunds are paid to people who have not paid or are not liable to pay tax. This is owing to the Earned Income Tax Credit or EITC. It is a refundable tax credit that is earned by low-income groups. This system was established in the year 1975 and the terms and conditions for this have changed over the years under different governments. It is a way of helping low-income families and families with children.

Most people look forward to their annual tax refund as a bonus to be spent or small savings that they have been forced to make. This is, however, a disadvantageous system for people who have become unemployed or who have just started working as for them it would be hard to wait for the annual payout with a large amount of their income being held till the refund is paid out.