Refund Adjusted Against Outstanding Demand Under Section 245
- PRITI SIRDESHMUKH
- Oct 31
- 9 min read
Section 245 of the Income Tax Act, 1961, empowers the Income Tax Department to adjust a taxpayer’s refund against any outstanding tax demand from previous years. Before such adjustment, the taxpayer receives an official intimation and a 30-day window to respond. This mechanism ensures recovery of unpaid dues while maintaining transparency and safeguarding taxpayer rights. With the Finance Act 2023 merging refund withholding provisions from Section 241A into Section 245, the process has become more unified and streamlined.
Table of Contents
What is Section 245 of the Income Tax Act?
Section 245 of the Income Tax Act, 1961, authorises the Income Tax Department to adjust a taxpayer’s current year’s refund against any outstanding tax liability from previous assessment years. However, before making such an adjustment, the Assessing Officer (AO) must issue a written intimation to the taxpayer and provide a 30-day window to respond. The intent behind this provision is to ensure that pending dues are recovered in a transparent manner while allowing taxpayers the opportunity to verify and contest old demands, if necessary.
After the Finance Act 2023, Section 241A (which dealt with withholding of refunds during scrutiny) was merged into Section 245 to create a unified mechanism for both refund adjustment and withholding. This change helps streamline the process and reduces procedural overlap, ensuring better coordination and fairness in handling refund-related matters.
When and Why Notices Under Section 245 Are Issued
A notice under Section 245 is typically issued when a refund is due for the current financial year, but the taxpayer has pending tax demands from earlier years. Before offsetting the refund, the Income Tax Department sends an official intimation through email and SMS, informing the taxpayer of the proposed adjustment.
Common reasons for receiving a Section 245 notice include:
Unpaid self-assessment or advance tax from prior years
TDS mismatches or errors in Form 26AS
Disallowance of certain deductions or claims in previous assessments
Rectification requests pending under Section 154
Old demands not updated or reversed despite payment evidence
The notice ensures that taxpayers are made aware of pending liabilities before the refund is adjusted, maintaining fairness in recovery.
Step-by-Step Process to Respond to a Section 245 Notice
Log in to the Income Tax e-filing portal using your PAN credentials.
Go to Pending Actions → Response to Outstanding Tax Demand.
Review the details of the proposed adjustment under Section 245.
Choose one of the following response options:
Agree with Demand: Confirm acceptance and submit. The system will automatically adjust your refund against the pending amount.
Disagree Fully or Partially: Select “Disagree with Demand,” specify valid reasons, and upload supporting documents such as payment proofs, TDS certificates, or rectification orders.
Taxpayers must respond within 30 days from the date of intimation. If no response is submitted, the department automatically proceeds with the adjustment.
Refund Adjustment Under Section 245: Rules and Finance Act 2023 Update
The Finance Act 2023 brought significant clarity to refund adjustments by merging Section 241A (refund withholding) with Section 245. Earlier, these sections worked independently—Section 241A allowed withholding during scrutiny, and Section 245 permitted adjustment against existing dues. Now, both powers are combined, ensuring a more unified approach.
Under the updated rule, the Assessing Officer can either adjust or temporarily hold the refund if it affects revenue recovery. However, this can only be done after recording written reasons and obtaining approval from the Principal Commissioner or Commissioner of Income Tax. This ensures accountability and transparency in the refund handling process.
Example of Refund Adjustment Against Outstanding Demand
Suppose a taxpayer is eligible for a refund of ₹20,000 for the assessment year 2024–25. However, there is an outstanding tax demand of ₹15,000 from AY 2018–19. In this case, the department will issue an intimation under Section 245, informing the taxpayer of the proposed adjustment.
If the taxpayer does not contest the notice within 30 days, the refund will be adjusted as follows:
Assessment Year | Particulars | Amount (₹) |
2018–19 | Outstanding Demand | 15,000 |
2024–25 | Refund Due | 20,000 |
Adjusted Refund Payable | 5,000 |
|
The balance of ₹5,000 will be released as a refund after setting off the prior dues.
Legal Interpretation and Taxpayer Rights Under Section 245
Judicial precedents have consistently emphasized that taxpayers must be given an opportunity to respond before any refund adjustment is made. Adjustments without prior notice or beyond the permitted time frame are considered invalid and violative of the principles of natural justice.
Courts have also clarified that the department must verify the validity of the outstanding demand before making an adjustment. If the demand is found to be incorrect or already settled, the refund cannot be withheld or adjusted. The Finance Act 2023 further reinforces this by mandating higher-level approval before refunds are held or offset.
Key Points to Remember When Responding to Section 245 Notice
The notice provides a 30-day response period.
If no response is received, the refund is automatically adjusted.
Partial agreement options are available for disputed tax portions.
Refund adjustments may include interest under Section 234D.
Taxpayers receive intimation via registered email and SMS.
Supporting documents like challans or rectification orders are crucial when disputing a demand.
Once adjustment is done, the final refund status can be checked on the Income Tax e-filing portal.
What Happens If You Ignore a Section 245 Notice?
If a taxpayer ignores the Section 245 notice, the Income Tax Department automatically adjusts the refund against the outstanding demand after the 30-day response window expires. This can lead to loss of refund even if the demand was incorrect. In some cases, interest may continue to accrue on the remaining unpaid portion. Ignoring the notice may also limit the taxpayer’s ability to contest the adjustment later, making prompt action essential.
Can a Wrongful Refund Adjustment Be Reversed?
Yes, wrongful or erroneous refund adjustments can be reversed. If the taxpayer can provide evidence that the earlier demand was invalid, already paid, or adjusted incorrectly, a rectification request can be filed under Section 154 through the Income Tax portal. Supporting documents such as challans, TDS statements, or previous orders must be submitted. After verification, the department can reverse the adjustment and reissue the refund with applicable interest.
How to Check if Your Refund Was Adjusted Against Old Tax Dues
To verify refund adjustment status:
Log in to the Income Tax e-filing portal.
Go to My Account → Refund/Demand Status.
Review details showing refund issued, adjusted, or pending.
Check for any linked communications or notices under Section 245 in your email or message inbox.
If a refund has been adjusted, the entry will clearly specify the assessment year, amount adjusted, and balance (if any). TaxBuddy experts can help review this data and confirm whether the adjustment is valid.
Role of TaxBuddy in Handling Refund Adjustments and Notices
TaxBuddy simplifies the process of managing Section 245 notices by combining automation with expert oversight. The platform enables users to review outstanding demands, submit online responses, upload supporting evidence, and track refund status seamlessly. Its AI-driven system ensures quick detection of mismatches or old demands that may affect refunds. TaxBuddy’s expert-assisted plans also provide personalized help in disputing incorrect adjustments, ensuring every taxpayer gets the rightful refund efficiently.
Conclusion
Section 245 ensures that outstanding tax dues are settled before refunds are released, but it also safeguards taxpayer rights through mandatory prior intimation and a 30-day response window. Timely action is essential to prevent wrongful adjustments or delays in receiving refunds. For a smooth and reliable experience in handling such notices, it is highly recommended to download theTaxBuddy mobile app for a simplified, secure, and hassle-free experience.
FAQs
Q1. Does TaxBuddy offer both self-filing and expert-assisted plans for ITR filing, or only expert-assisted options? TaxBuddy offers both self-filing and expert-assisted plans for taxpayers. Individuals comfortable with filing their own returns can use the self-filing option, which provides a guided step-by-step process to ensure accuracy and compliance. Those who prefer professional help can opt for expert-assisted plans, where certified tax experts handle the entire process—from document verification to submission and post-filing support. Both options ensure accurate and timely filing with the added advantage of AI-driven validation for error-free returns.
Q2. Which is the best site to file ITR? The best site to file Income Tax Returns (ITR) depends on a taxpayer’s needs. The official Income Tax e-filing portal (incometax.gov.in) is suitable for direct self-filing. However, for a simplified and guided experience, platforms like TaxBuddy are preferred by many taxpayers. TaxBuddy offers AI-assisted filing, pre-filled data imports, expert review options, and post-filing support for notices and refunds—all designed to make the process quick, secure, and stress-free.
Q3. Where to file an income tax return? Income Tax Returns can be filed online through the government’s e-filing portal at www.incometax.gov.in. Alternatively, taxpayers can use trusted online platforms like TaxBuddy to file their returns. These platforms provide intuitive interfaces, automatic form selection based on income type, and error checks to prevent common mistakes. Using such platforms ensures a smoother experience and faster acknowledgment from the Income Tax Department.
Q4. How can I check if my refund is adjusted under Section 245? To check if your refund has been adjusted under Section 245, log in to the Income Tax e-filing portal and navigate to “My Account → Refund/Demand Status.” Here, you can see details about refund processing, adjustments, and pending demands. Additionally, an intimation email and SMS are usually sent by the Income Tax Department if any adjustment has been made. TaxBuddy users can also access refund status directly through the platform’s dashboard, which displays updates on refund processing, adjustments, and pending demands.
Q5. What happens if I ignore a Section 245 notice? If a taxpayer ignores a Section 245 notice, the Income Tax Department automatically adjusts the refund against outstanding tax dues after 30 days from the notice date. This adjustment is considered final and can lead to the forfeiture of part or all of the refund, even if the demand was incorrect. Ignoring the notice also limits the taxpayer’s right to dispute or appeal the adjustment later. Therefore, it’s essential to review and respond promptly within the given window.
Q6. Can I disagree partially with the outstanding demand? Yes, the e-filing portal allows taxpayers to partially agree with the demand raised under Section 245. When submitting a response, you can select “Disagree with Demand” and specify the portion you contest. For the disputed amount, upload supporting documents such as challans, rectification orders, orTDS certificates. The Income Tax Department reviews your submission before proceeding with any adjustment. Partial disagreement ensures that only the undisputed portion is adjusted while the remaining amount remains under review.
Q7. What is the time limit to respond to a Section 245 intimation? Taxpayers are given 30 days from the date of issuance of the Section 245 intimation to respond. If a response is not submitted within this timeframe, the Income Tax Department proceeds with automatic adjustment of the refund against the pending tax demand. It’s advisable to act promptly, review the details on the e-filing portal, and submit the response—either agreeing or disagreeing—to prevent any unintentional adjustments.
Q8. Can I get back my refund after wrongful adjustment? Yes, if your refund was wrongly adjusted under Section 245, you can request a reversal by filing a rectification application under Section 154. Provide documentary proof, such as challans or acknowledgments, to show that the demand was invalid or already paid. Once verified, the department reverses the adjustment and issues the refund, along with interest if applicable. TaxBuddy’s team can assist in filing rectifications and following up until the corrected refund is processed.
Q9. Is refund withholding still applicable after Finance Act 2023? The Finance Act 2023 merged Section 241A, which earlier dealt with refund withholding during scrutiny, into Section 245. This means that all powers related to both withholding and adjusting refunds are now governed under Section 245. The Assessing Officer can hold or adjust a refund only after recording valid reasons in writing and obtaining approval from higher authorities. This consolidation ensures a uniform and transparent approach while protecting taxpayers from unjustified refund delays.
Q10. How does TaxBuddy help handle refund adjustments? TaxBuddy simplifies refund management through its AI-powered and expert-assisted services. The platform helps users review outstanding demands, verify refund adjustments, and respond to Section 245 notices directly through its dashboard. For disputed or incorrect adjustments, TaxBuddy’s team assists in preparing objections, uploading supporting documents, and filing rectification requests. The platform also tracks the progress of refunds and ensures timely communication between taxpayers and the department.
Q11. Can the refund adjustment be reversed after rectification? Yes, once the Income Tax Department verifies that the earlier demand was invalid or already settled, the refund adjustment can be reversed. This typically happens through a rectification order under Section 154. The refund amount, along with applicable interest, is reissued to the taxpayer’s bank account. It’s important to provide accurate and complete documentation during the rectification process to avoid delays. Using TaxBuddy ensures professional handling of such corrections and faster resolution.
Q12. Are Section 245 adjustments applicable under both old and new tax regimes? Yes, Section 245 adjustments apply to all taxpayers irrespective of the tax regime chosen. Whether the return is filed under the old or new regime, any pending tax demand from earlier years can be adjusted against the current year’s refund after due intimation. The section deals purely with refund adjustment mechanisms and not with the computation of income or deductions, making it universally applicable to all tax filers.
Comments