Section 245 Refund Adjustment Rules Explained for 2025
- Asharam Swain
- Dec 10, 2025
- 9 min read
Section 245 of the Income Tax Act empowers the Income Tax Department to adjust a taxpayer’s refund against any existing tax demand or outstanding dues. This mechanism ensures that before issuing a refund, the department verifies whether the taxpayer owes any amount for previous assessment years. With updates introduced in Budget 2025 and recent CBDT notifications, the process has become more transparent and taxpayer-friendly. Clear communication through online notices and pre-adjustment intimation now allows individuals to respond promptly and confirm outstanding dues before any refund is offset by the department.
Table of Contents
What Is Section 245 of the Income Tax Act
Section 245 of the Income Tax Act empowers the Income Tax Department to adjust a taxpayer’s refund against any outstanding tax demand from a previous financial year. Essentially, if a taxpayer is due a refund in the current year but has pending dues—such as tax arrears, penalties, or interest from earlier assessments—the department can use that refund amount to clear the outstanding liability. However, such an adjustment can only be made after notifying the taxpayer and allowing them an opportunity to respond. This ensures fairness and transparency in the refund adjustment process.
How Refund Adjustment Works Under Section 245
When a taxpayer’s return is processed and a refund is determined, the Centralized Processing Centre (CPC) cross-checks the refund against any existing demands. If a previous demand is found, the system initiates an adjustment under Section 245. The taxpayer receives an intimation via email or SMS, usually through the CPC portal, stating the intention to adjust the refund. The taxpayer must confirm or contest the adjustment by responding within the specified timeline. If the taxpayer agrees or does not respond, the refund is adjusted automatically, and a final communication is sent confirming the amount adjusted.
Section 245 Refund Adjustment Rules for 2025
As per the latest rules for FY 2024-25 and AY 2025-26, the refund adjustment process under Section 245 has become more streamlined through automated verification systems. The department must issue a prior intimation before making any adjustment. If no response is received from the taxpayer within 30 days, the system assumes consent and proceeds with the adjustment. However, if the taxpayer disputes the demand, the CPC pauses the adjustment until the dispute is resolved. Additionally, taxpayers can now track the entire process and status of adjustments in their e-filing portal under “Pending Actions.”
Taxpayer Rights and Departmental Obligations
Under Section 245, taxpayers have clear rights to fair treatment. The department cannot adjust any refund without first informing the taxpayer. The taxpayer has the right to:
Receive written intimation before adjustment.
Verify the legitimacy of the outstanding demand.
Dispute or rectify incorrect demands within the stipulated time. The Income Tax Department, on its part, must ensure that only verified and undisputed demands are adjusted. Incorrect or outdated entries cannot be used for refund set-offs. This framework protects taxpayers from wrongful deductions and promotes accountability within the department.
Common Scenarios of Refund Adjustment Under Section 245
Refund adjustments commonly occur in cases where taxpayers have unpaid self-assessment tax, pending advance tax dues, or outstanding TDS mismatches from earlier years. Sometimes, even small discrepancies such as missed interest calculations under Sections 234A, 234B, or 234C can trigger a demand. Refund adjustments may also arise from rectification orders or reprocessed returns where previous underreporting has been corrected. In some cases, demands raised during reassessment or scrutiny proceedings can also lead to partial or full adjustment of refunds.
How to Respond to a Section 245 Notice
When a taxpayer receives a notice under Section 245 of the Income Tax Act, it means that the Income Tax Department intends to adjust any pending refund against an existing tax demand from previous years. The notice serves as an intimation and provides an opportunity for the taxpayer to confirm or dispute the claim before any adjustment is made.
The first step after receiving the notice is to log in to the official income tax e-filing portal using your PAN and password. Once logged in, navigate to the “Pending Actions” tab and select “Response to Outstanding Demand.” This section will display details of the demand raised, including the assessment year, demand amount, and status. Carefully review this information and verify its accuracy by cross-checking with your Form 26AS, Annual Information Statement (AIS), and past assessment orders.
If the demand shown is correct, such as when you have missed paying self-assessment tax or there is a shortfall in TDS, you can choose to accept the adjustment. In this case, the refund due to you will be automatically used to settle the outstanding demand either in part or full, depending on the amount. The system will notify you once the adjustment has been made, and the balance refund, if any, will be credited to your registered bank account.
However, if you believe that the demand is incorrect or already paid, you should select the “Disagree” option on the portal. Provide a clear reason for disagreement, along with supporting documentation such as proof of tax payment challans, rectification order details, or acknowledgment of a revised or rectified return. For example, if you have already paid the demand through a challan that is not yet reflected in the system, attach the challan copy for verification.
It is extremely important to respond to the notice within the prescribed time limit of 30 days from the date of issue. Ignoring the notice or failing to reply within this period will lead to an automatic adjustment of your refund, even if the demand is later found to be incorrect. Once the adjustment is completed, reversing it can be time-consuming and may require filing a rectification request or contacting the assessing officer.
After submitting your response, you can monitor the status of your submission under the same “Response to Outstanding Demand” section. The department will review the documents and update the demand status accordingly. In some cases, the Central Processing Centre (CPC) may contact you for additional clarification before finalizing the adjustment.
To avoid future issues related to Section 245 notices, taxpayers should regularly reconcile their tax credits with Form 26AS and AIS, verify TDS entries from employers and banks, and ensure that self-assessment taxes are correctly reported before filing returns. Using professional filing platforms like TaxBuddy can simplify this process by automatically checking mismatches, validating challan entries, and ensuring timely communication with the Income Tax Department, minimizing the chances of refund adjustments or incorrect demands..
Appeal and Rectification Process for Wrong Adjustments
If a taxpayer’s refund is wrongly adjusted, the issue can be resolved through rectification or appeal. The taxpayer should first file a rectification request under Section 154 through the income tax portal, citing the specific mistake and attaching relevant proof. If the issue is not resolved at the CPC level, the taxpayer can escalate it to the Assessing Officer or file an appeal before the Commissioner of Income Tax (Appeals) [CIT(A)]. Timely action is essential, as refunds once adjusted may take several weeks to be restored even after the correction is approved.
Preventing Future Refund Adjustments
Taxpayers can avoid refund adjustments by ensuring that all past demands are reviewed and cleared before filing new returns. Regularly checking Form 26AS, AIS (Annual Information Statement), and the “Outstanding Demand” tab on the e-filing portal helps identify pending issues early. Any incorrect demand can be rectified by filing an online request before the refund is processed. Maintaining accurate records, timely payment of advance tax, and matching TDS credits also minimize the chances of unexpected adjustments under Section 245.
Role of AI-Driven Platforms Like TaxBuddy
AI-driven platforms like TaxBuddy simplify refund and demand management by automating reconciliation and cross-verification. TaxBuddy’s system checks for outstanding demands before filing, ensuring that taxpayers are aware of potential adjustments. It also validates TDS credits, advance tax payments, and previous filings to eliminate discrepancies that might trigger notices. In cases where an adjustment notice is issued, TaxBuddy assists users in drafting responses, uploading documents, and tracking status updates—saving time and ensuring compliance with Section 245 procedures.
Conclusion
Section 245 ensures that taxpayers settle outstanding liabilities before receiving refunds, maintaining fiscal discipline. However, it also emphasizes transparency by mandating prior intimation and the right to dispute incorrect claims. Taxpayers should stay vigilant about old demands and monitor their refund status regularly. For hassle-free management of refund adjustments, expert guidance and automation tools can make the process far more efficient.
For anyone looking for assistance in tax filing, it is highly recommended to download the TaxBuddy mobile app for a simplified, secure, and hassle-free experience.
FAQs
Q1. What is the purpose of Section 245 of the Income Tax Act? Section 245 empowers the Income Tax Department to adjust a taxpayer’s pending refund against any outstanding tax liabilities from previous assessment years. This ensures that no refund is issued before clearing past dues. However, the department must inform the taxpayer before making such an adjustment. The intent is to settle any unpaid tax amounts without initiating separate recovery proceedings.
Q2. Can the department adjust a refund without prior notice? No, the Income Tax Department cannot adjust a refund without notifying the taxpayer. Before any adjustment, an official intimation is sent under Section 245 through the e-filing portal or registered email. This gives the taxpayer an opportunity to verify the pending demand and either accept or dispute it. Adjusting a refund without prior communication would violate procedural fairness.
Q3. How much time does a taxpayer have to respond to a Section 245 notice? Typically, the taxpayer has 30 days from the date of issue of the notice to respond. During this time, the taxpayer can review the outstanding demand, check records such as Form 26AS and AIS, and decide whether to agree or disagree with the adjustment. If an incorrect demand has been raised, the taxpayer can provide clarifications and supporting evidence through the e-filing portal.
Q4. What happens if no response is submitted to the Section 245 notice? If a taxpayer fails to respond within the specified period, the Income Tax Department assumes consent and proceeds with the adjustment automatically. The refund is then reduced by the outstanding demand amount. This highlights the importance of regularly checking communication from the department and responding promptly to avoid unintended deductions.
Q5. Can an incorrect adjustment be reversed? Yes, if the adjustment was made in error, the taxpayer can request rectification under Section 154 of the Income Tax Act. This can be done online by submitting a rectification request along with supporting documents like payment challans or proof of already settled dues. In certain cases, the taxpayer can also approach the Assessing Officer directly for correction.
Q6. What documents are needed to dispute a Section 245 adjustment? To dispute an incorrect adjustment, taxpayers must submit documents such as:
Challans or proof of tax payment
Form 26AS or AIS showing credited taxes
Rectified ITR acknowledgment if refiled
Correspondence or orders clarifying earlier demands These documents help validate that the demand has already been cleared or was wrongly raised.
Q7. Are Section 245 adjustments applicable to all taxpayers? Yes, Section 245 applies to all categories of taxpayers—individuals, professionals, companies, and partnerships. Whenever a taxpayer has any outstanding tax demand for a prior financial year and a refund due for a later year, the department can offset the two amounts after due intimation.
Q8. How can a taxpayer check pending tax demands online? Pending tax demands can be checked on the income tax e-filing portal. After logging in, navigate to the “Pending Actions” tab and select “Response to Outstanding Demand.” This section displays all pending tax dues, along with assessment years, demand amounts, and status updates. Taxpayers can then choose to agree or disagree with the demand through this online interface.
Q9. What if the taxpayer disagrees with the demand amount? If a taxpayer disagrees with the outstanding demand, they can select the “Disagree” option on the portal and upload supporting evidence. The reasons may include incorrect computation, duplicate demand, or tax already paid but not reflected in records. The department will review the submission and update the demand status based on the verification.
Q10. Can the refund adjustment happen for a small outstanding amount? Yes, even a small unpaid amount, such as interest or penalty, can trigger a refund adjustment under Section 245. The system automatically identifies pending amounts regardless of size. To prevent this, taxpayers should review their Form 26AS and AIS regularly and settle any small pending dues before filing returns.
Q11. Does TaxBuddy help with refund adjustments under Section 245? Yes, TaxBuddy helps users detect potential refund adjustments and mismatches before filing their returns. It reviews Form 26AS, AIS, and demand notices to ensure accurate reporting. In case of a Section 245 notice, TaxBuddy’s experts guide taxpayers on how to respond or file rectification requests to correct discrepancies efficiently.
Q12. How can taxpayers prevent refund adjustments in future filings? To avoid refund adjustments, taxpayers should reconcile their tax records periodically, verify TDS and advance tax payments, and ensure no pending liabilities remain from previous years. Filing returns through trusted platforms like TaxBuddy ensures accurate data validation and timely resolution of mismatches, minimizing the chances of refund delays or adjustments.
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