Section 245: When Your Refund Is Adjusted Against an Old Tax Demand

You filed, you were due a refund, and what arrived was a fraction of it or nothing at all. Before assuming a payment failure, check whether an intimation under Section 245 was issued. It is the notice that warns you the department intends to set your refund off against tax it believes you still owe from an earlier year, and it is easy to miss because it arrives as an email rather than anything more insistent. The critical feature is the deadline. You are given an opportunity to object, generally 30 days, and if you say nothing you are taken to have agreed. The adjustment then goes ahead, and unwinding it afterwards is considerably harder than preventing it.

What the Section Actually Permits

Section 245 allows a refund due to you for one year to be applied against a demand outstanding for another. The logic is straightforward: there is little sense in the department paying you money while you owe it money. What the section does not permit is doing this silently. The proviso requires that you be given an opportunity of being heard first, which is exactly what the intimation is. The adjustment is meant to follow your response, or your failure to give one, rather than precede it.

This matters because old demands are frequently wrong. A demand may sit on the system from a year in which the tax was actually paid but the challan was tagged to the wrong assessment year, or where TDS credit was denied because a deductor filed late, or where a rectification was allowed but the demand was never cleared from the records. Many taxpayers discover a demand from six or seven years ago that they have no memory of because they were never effectively told about it at the time.

Check This Before Any Refund Season

You do not have to wait for a 245 intimation to find out where you stand. Log in to the e-filing portal and open Pending Actions, then Response to Outstanding Demand. Every demand the department currently holds against your PAN is listed there, by assessment year, with its amount and status. Doing this before you file, rather than after your refund fails to arrive, converts a reactive scramble into a routine check. If a demand is listed that you dispute, you can respond to it there and then, independently of any refund adjustment.

How to Respond, and the Grounds That Work

The portal asks whether you agree with the demand, and if you disagree, requires you to select a specific reason and support it. Vague disagreement is not a response. The grounds available map onto the situations that actually produce wrong demands.

Where the demand traces back to a challan tagged to the wrong assessment year, the fix is usually a challan correction rather than a dispute about liability, since the money reached the department and simply sits against the wrong year. Where it traces back to a denied TDS credit, the underlying repair is at the deductor's end: the credit has to appear against your PAN before it can be allowed, which is the same sequence described in our guide to reading a 143(1) intimation.

If the Adjustment Has Already Happened

A completed set-off is not necessarily final, but the burden shifts to you. Start by establishing what the demand actually was, which means obtaining the underlying order for that year rather than working from the one-line description on the portal. If the demand was wrong, the route is a rectification under Section 154 for that year, and if the order was wrong in substance rather than in computation, an appeal, subject to its own time limits. Where a rectification succeeds and the demand is deleted, the adjusted amount becomes refundable again. This is slower and more effortful than objecting within the original 30 days, which is the whole argument for treating a 245 intimation as urgent when it lands.

One practical note on interest. Where a refund is legitimately adjusted against a genuine demand, you do not receive interest on the adjusted portion, because it was never money the department was holding wrongly. Where an adjustment is later reversed because the demand was incorrect, the position on interest depends on the facts and the period involved, which is one more reason to resolve a disputed demand before it consumes a refund rather than afterwards. If your refund has not arrived and no 245 intimation exists, the cause is likely elsewhere, and our post on why refunds stall covers the other four possibilities.