Refund Set-Off Under Section 245: Detailed Process Explained
- Rashmita Choudhary
- 1 day ago
- 9 min read
Refund adjustments under Section 245 often catch taxpayers off-guard, especially when expecting a refund for the current year but receiving an intimation instead. Section 245 empowers the Income Tax Department to set off an upcoming refund against unpaid tax dues from previous years. This adjustment is not automatic; it involves an official notice, a response window, and a mandatory review of objections before any action. Understanding what triggers these adjustments, how the set-off works, and what steps ensure smooth processing helps prevent unexpected refund delays and improves compliance.
Table of Contents
Refund Set-Off Under Section 245: What It Means
Refund set-off under Section 245 refers to the legal process where the Income Tax Department adjusts a taxpayer’s refund against outstanding tax liabilities from past assessment years. This process safeguards government revenue while ensuring the taxpayer receives due notice and a chance to respond. Before initiating the adjustment, the department must inform the taxpayer about pending dues, specify the intent to adjust the refund, and allow an opportunity to dispute or confirm the proposed action.
Detailed Process of Refund Set-Off Under Section 245
The process of refund set-off under Section 245 starts with the Income Tax Department verifying the taxpayer’s PAN for any pending tax demands from earlier assessment years. These demands may arise from past assessments, rectification orders, interest adjustments, or unresolved discrepancies. Once the system identifies a pending demand, the department cross-checks it with the current refund amount to determine whether an adjustment is required.
After confirming the legitimacy of the outstanding demand, the department issues a formal Section 245 intimation through the e-filing portal and also sends an email and SMS alert. This intimation outlines the exact details of the pending demand, the refund expected for the current year, and the portion proposed to be adjusted. The communication is mandatory and ensures that the taxpayer is aware of the action being considered.
The taxpayer is then given a specific window—generally between 15 and 30 days—to review the details and respond. During this period, the taxpayer may agree with the demand, partially agree, or disagree entirely. In case of disagreement, the portal allows the taxpayer to submit objections along with supporting documents such as challans, assessment orders, or proof of earlier payments. The response mechanism ensures that incorrect or outdated tax demands are not adjusted against refunds without proper examination.
Once the response is submitted, the Assessing Officer evaluates the details and verifies the correctness of the taxpayer’s claims. If the objections are valid, the officer may modify or drop the demand. If the taxpayer agrees with the demand or does not respond within the allotted time, the department proceeds with the adjustment. The refund is then either fully or partially set off against the outstanding tax liability. After completing the process, the taxpayer receives a final intimation reflecting the updated refund status and the revised demand position.
This structured process ensures transparency, prevents arbitrary recovery, and gives taxpayers sufficient opportunity to challenge incorrect or outdated demands before any refund is adjusted.
Authority to Set Off Refunds Under Section 245
Only specific officers have the legal authority to execute a refund set-off. These include the Assessing Officer, Deputy Commissioner (Appeals), Commissioner (Appeals), and Principal Commissioner. Their authority is derived directly from Section 245 of the Income Tax Act, which enables them to recover legitimate dues by adjusting refunds. This authority must be exercised strictly according to procedure, ensuring the taxpayer’s right to respond is not bypassed.
Issuance of Intimation Before Refund Adjustment
The department cannot adjust any refund without issuing a formal, written intimation under Section 245. This notice specifies the exact demand pending, the refund expected, and the amount proposed for adjustment. The notice also informs the taxpayer of the response window. Issuing this intimation is mandatory; adjustments made without it violate the due-process requirement reaffirmed by multiple court rulings and CBDT instructions.
Taxpayer’s Response Timeline and Options
Taxpayers typically receive a 15–30 day period to respond to a Section 245 intimation. Responses may include agreeing with the demand, partially agreeing, or completely disagreeing. If the taxpayer contests the demand, supporting documents should be attached through the e-filing portal. The Assessing Officer must examine the objections before taking further action. If the response is not filed in time, the department may proceed with the proposed adjustment.
How Refund Adjustment Is Carried Out Under Section 245
The adjustment may be full or partial depending on the outstanding demand. If the refund exceeds the tax dues, the balance (after adjustment) is credited to the taxpayer’s bank account. If the demand is higher, the entire refund is absorbed to reduce the liability. Once the adjustment is completed, the taxpayer receives a final communication reflecting the updated refund status and demand position.
When Refunds Can Be Withheld Under Section 245
Refunds of ₹10 lakh or more may be withheld in certain cases, especially when ongoing scrutiny, reassessment, or verification proceedings require further examination. Such withholding cannot be arbitrary; the Assessing Officer must record detailed reasons and obtain written approval from the Principal Commissioner or Commissioner. This safeguard was reinforced under CBDT Instruction No. 02/2023 to prevent unjust delays.
Legal Safeguards and Compliance Requirements Under Section 245
The Delhi High Court and CBDT have repeatedly clarified that refund adjustments must follow due process. No refund can be set off without issuing an intimation and giving the taxpayer an opportunity to respond. Failure to consider objections, improper withholding, or mechanical adjustments can be challenged. Courts have emphasized that Section 245 is a recovery tool, but it must balance revenue interests with taxpayer rights.
Importance of Correct Bank Account Details for Refunds
Even after a valid adjustment under Section 245, refunds may fail if the bank account details provided in the ITR are incorrect or inactive. The income tax system validates the account for correctness and linkage with PAN before attempting credit. Errors or mismatches can disrupt the payment process, leading to refund reversals or prolonged delays.
Impact of Incorrect Bank Details on Refund Set-Off
Incorrect bank details can complicate a Section 245 adjustment because the system may successfully carry out the set-off but fail to credit the remaining balance due to an invalid account. This creates confusion for taxpayers who see the refund processed but not received. A mismatch in IFSC, account number, or PAN-bank linkage often triggers such issues. Correcting the bank details through the e-filing portal and re-validating the account usually resolves these problems.
How TaxBuddy Helps With Section 245 Notices and Refund Issues
Section 245 notices often cause confusion because taxpayers may not be aware of pending demands from older years. TaxBuddy offers streamlined assistance by identifying mismatches, verifying demands, preparing responses, and guiding taxpayers through the decision of accepting or contesting adjustments. The platform’s expert-reviewed process ensures timely compliance, and its app-based tools help track notices, validate bank details, and manage refund status without stress.
Conclusion
Understanding how refund set-off under Section 245 works helps prevent unexpected refund delays and ensures prompt action when an intimation is issued. Taxpayers who stay vigilant about pending demands, provide correct bank details, and respond within timelines can avoid unnecessary complications. 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
Q. Does TaxBuddy offer both self-filing and expert-assisted plans for ITR filing, or only expert-assisted options? TaxBuddy offers both filing options to suit different levels of expertise. The self-filing system uses an AI-driven interface that automatically reads Form 16, AIS, TIS, and other income records, reducing manual effort and minimizing errors. Users comfortable with DIY tax filing can complete their return independently while benefiting from automated accuracy checks. For those with multiple income sources, capital gains, foreign assets, or complex tax situations, TaxBuddy’s expert-assisted plan provides complete end-to-end support. A qualified tax expert reviews all entries, applies the correct tax rules, resolves mismatches, and files the return on behalf of the taxpayer.
Q. Which is the best site to file ITR? The best site depends on the complexity of the taxpayer’s income and the level of support required. The official Income Tax Department portal is the primary government platform for filing returns. It works well for those familiar with ITR forms and manual data entry. However, many taxpayers prefer platforms like TaxBuddy, which offer guided filing through automation, error detection, document scanning, and expert intervention. These additional layers make the filing process smoother and reduce the chances of mistakes that may trigger future notices or refund delays.
Q. Where to file an income tax return? Income tax returns can be filed directly on the official portal at incometax.gov.in. Alternatively, taxpayers may choose private e-filing platforms that integrate automation and expert support to simplify the process. These platforms, including TaxBuddy, help decode income categories, auto-import information, highlight potential errors, and manage refund-related issues, making them suitable for both salaried individuals and self-employed taxpayers.
Q. What is Section 245 refund set-off? Section 245 allows the Income Tax Department to adjust the taxpayer’s current-year refund against any outstanding tax dues from previous years. Before making an adjustment, the department must issue a formal intimation containing details of the pending demand and the refund eligible for set-off. The taxpayer is given a chance to contest or accept the proposal. Only after reviewing the taxpayer’s response can the department proceed with the adjustment. This ensures transparency and prevents arbitrary recovery.
Q. How long is given to respond to a Section 245 intimation? The response period typically ranges between 15 and 30 days from the date the intimation is issued. The exact window depends on recent procedural timelines notified by the department. During this period, taxpayers can review the details, verify if the outstanding demand is accurate, and file objections if required. If no response is submitted within the timeline, the department may proceed with the proposed adjustment automatically.
Q. What happens if the taxpayer disagrees with the proposed set-off? If the taxpayer disputes the demand, a detailed objection must be filed through the e-filing portal. Supporting documents such as challans, past returns, rectification orders, or correspondence with the department can be attached. The Assessing Officer must review the dispute, verify the records, and make a decision based on the merits of the objection. Adjustment cannot be carried out until this review is completed. A valid objection may lead to withdrawal or modification of the demand, ensuring the taxpayer’s rights remain protected.
Q. Can the Income Tax Department withhold refunds above ₹10 lakh? Yes, refunds of ₹10 lakh or more may be withheld if there are ongoing scrutiny or reassessment proceedings or if additional verification is required. However, the authority to withhold such refunds is tightly regulated. The Assessing Officer must provide written reasons explaining why the refund cannot be released immediately and must obtain prior approval from the Principal Commissioner or Commissioner. CBDT Instruction No. 02/2023 clearly states that withholding cannot be done without justification and supervisory approval.
Q. What if a refund is adjusted without issuing a Section 245 intimation? If a refund is adjusted without issuing a mandatory intimation, the action is considered a violation of due process. The law requires the department to inform the taxpayer and provide a response window before taking any adjustment-related step. In such cases, taxpayers may raise a grievance on the e-filing portal, submit a request for correction, or escalate the issue to the Assessing Officer. Courts have consistently held that any adjustment without intimation is invalid and must be reversed.
Q. How does incorrect bank information impact refund credit? Incorrect bank details—such as a wrong account number, incorrect IFSC code, or inactive bank account—can cause the refund to bounce back even after processing. In cases where a partial refund remains after Section 245 adjustment, incorrect bank information may delay or block the credit entirely. The bank validation process may fail, and the system may not attempt to transfer the refund. Updating the correct details and re-validating the account is the only way to enable the refund credit.
Q. Can a refund be credited to a different bank account than the one in ITR? Yes, a refund can be credited to a different bank account as long as the new account is added and pre-validated in the taxpayer’s profile on the e-filing portal. Once validated, the taxpayer may request refund reissue and select the updated bank account for credit. The income tax system only credits refunds to validated accounts to ensure accuracy and prevent fraud.
Q. What should be done if a refund is reversed due to bank mismatch? A refund reversal occurs when the bank rejects the credit because the details provided do not match the bank records. To resolve this, the taxpayer must:
Update the correct bank account details on the e-filing portal.
Complete the pre-validation process.
Submit a refund reissue request from the “Refund Reissue” section. Once the updated details are approved, the refund is reprocessed and credited to the corrected account.
Q. How does linking PAN with the correct bank account help ensure prompt refunds? Linking PAN with the bank account enables automatic validation and reduces the likelihood of credit failures. PAN linkage ensures the system can authenticate account ownership and match taxpayer records accurately. This speeds up refund processing, minimizes manual verification, and lowers the risk of the refund being rejected due to identity mismatch or incomplete account verification.
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