Section 245Adjustment of Refund Against Outstanding Demand
Section 245 lets the department set a refund due to you against tax demands outstanding from earlier years, after giving you an opportunity to respond.
In short
- The adjustment is not automatic in the sense of being unannounced. The department must give you an opportunity to respond before setting off.
- You have a window to agree, to disagree with reasons, or to state that the demand has already been paid.
- Silence is treated as agreement, and the refund is adjusted.
- Most old demands trace back to an unaddressed Section 143(1) intimation, a TDS credit mismatch, or a payment made but never linked to the right assessment year.
- Outstanding demands are visible on the e-filing portal before any adjustment happens, so this is checkable in advance rather than only when a refund goes missing.
Who it applies to
- Taxpayers with a refund due in one year and an unpaid demand outstanding from any earlier year
- Anyone whose refund has been reduced or has not arrived despite the return being processed
- Taxpayers carrying old demands they were unaware of, often arising from unresolved 143(1) intimations
How it works
Section 245 is the answer to one of the most common questions taxpayers ask: the return was processed, a refund was computed, and nothing arrived. The usual explanation is that the department applied the refund against a demand outstanding from an earlier year, which the section expressly permits it to do, provided it gives the taxpayer prior intimation and an opportunity to respond.
That opportunity is real and worth using. The notice sets out the demand it proposes to adjust against, by assessment year and amount, and gives you a window to respond on the portal with one of three positions: that you agree with the demand, that you disagree and why, or that the demand has already been paid and here is the challan. If you do not respond within the window, agreement is inferred and the set-off proceeds.
The demands themselves are frequently stale, and often genuinely wrong. The most common origin is a Section 143(1) intimation from years earlier that raised a small demand the taxpayer either never saw or assumed was a formality. Others come from TDS credit that was disallowed because a deductor had not filed their return at the time of processing, even though it appears in Form 26AS now. A third category is tax that was actually paid, but against the wrong assessment year or the wrong minor head on the challan, so it sits in the system unmatched.
Each of those has a different remedy. A demand arising from a disallowed TDS credit that has since appeared in your 26AS is corrected by a rectification request under Section 154. A challan applied to the wrong year is corrected by a challan correction request. A demand that is simply wrong on the merits is disputed on the portal with supporting computations. What all three have in common is that they are far easier to resolve while the response window is open than after the adjustment has been made.
The practical advice is to look before you are told. Outstanding demands are visible on the e-filing portal at any time under the pending actions for response to outstanding demand, and a taxpayer who checks that page once a year is never surprised by a missing refund. This is particularly worth doing before filing a return that will produce a large refund.
Also searched as: section 245 notice, refund adjusted against demand, refund set off, income tax return amount not received, Section 245, Section 438.
Frequently asked questions
Why was my income tax refund not credited?
The most common reasons are an adjustment against an old demand under Section 245, a bank account that is not pre-validated or whose PAN name does not match, or a return that was filed but never e-verified. Check the outstanding demand page and the refund status on the e-filing portal, since both state the reason directly.
Can the department adjust my refund without telling me?
It must give you prior intimation and an opportunity to respond before adjusting. In practice, taxpayers often miss the intimation because it goes to an email address they no longer monitor, and since no response is treated as agreement, the adjustment proceeds. That is why checking the portal directly is more reliable than waiting for email.
How do I respond to a Section 245 notice?
On the e-filing portal, under pending actions for response to outstanding demand. You can agree with the demand, disagree with it in full or in part with reasons, or state that it has already been paid and provide the challan details. Respond within the window stated, because silence is taken as agreement.
What if the old demand is genuinely wrong?
Disagree on the portal and pursue the underlying correction. If it arose from TDS credit that has since appeared in Form 26AS, file a rectification under Section 154. If you paid against the wrong assessment year, request a challan correction. If it is wrong on the merits, submit the computation showing why.
Worked detail on this section
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Disclaimer
This page explains what a statutory provision does in general terms. It is not a substitute for the bare act, and it is not professional tax or legal advice. Rates, thresholds, and limits change with each Finance Act, and applicability turns on facts specific to you. Confirm anything that affects a real filing with a qualified Chartered Accountant.