Section 245 Notice: Refund Adjusted Against Tax Demand

Featured Snippet: A Section 245 notice is an intimation from the Income Tax Department informing you that your pending income tax refund will be adjusted against an outstanding tax demand. You have 30 days to respond. Log in to incometax.gov.in, go to Pending Actions, select Response to Outstanding Tax Demand, and choose whether you agree, partially agree, or disagree with the demand. If you do not respond, the refund is adjusted automatically.

Every year between June and September, millions of taxpayers file their income tax returns and expect a refund. For many, the refund never arrives. Instead, they receive an intimation under Section 245 stating that their refund has been (or will be) adjusted against an outstanding demand from a current or prior assessment year. This can be confusing, especially when you were not aware of any pending demand.

This guide explains what Section 245 means, why you received this notice, how to respond within the 30-day window, and what to do if the demand is incorrect.

What Is Section 245 of the Income Tax Act?

Section 245 of the Income Tax Act, 1961, allows the Assessing Officer (AO) to set off any refund due to a taxpayer against any outstanding tax, interest, penalty, or other sum payable under the Act.

In simple terms: if the department owes you a refund but you also owe the department money (from any assessment year), the AO can adjust one against the other. The section applies to all types of income tax demands, whether they arise from a regular assessment, an intimation under Section 143(1), a scrutiny assessment under Section 143(3), or a best judgment assessment under Section 144.

Key legal safeguard: The department must send you an intimation before making the adjustment. This intimation gives you an opportunity to respond. The adjustment cannot happen without prior notice.

Scope of Section 245:

The adjustment is not limited to the same assessment year. A refund due for AY 2026-27 can be set off against a demand from AY 2022-23 or any earlier year, as long as the demand is reflected in the department's records.

Why You Received a Section 245 Intimation

Several scenarios trigger a Section 245 notice. Understanding the reason helps you decide whether to accept or contest the adjustment.

1. Demand from a prior assessment year not resolved

This is the most common trigger. You may have an outstanding demand from AY 2024-25 or earlier that was never rectified or paid. When you file for AY 2026-27 and a refund becomes due, the system flags the older demand and initiates adjustment.

2. TDS credit not matching department records

If the TDS you claimed in your return does not match what appears in Form 26AS or the AIS, the processed return under Section 143(1) may create a demand. This demand then blocks your refund in a subsequent year.

3. Incorrect section or schedule in the ITR

Filing under the wrong section (for example, claiming a deduction not available under the new tax regime) can result in a mismatch during processing, leading to a demand.

4. Interest or penalty from a previous assessment

Outstanding interest under Section 234A, 234B, or 234C, or a penalty that was imposed but not paid, also counts as a "sum payable" under the Act.

5. Demand from an intimation under Section 143(1)

CPC Bengaluru processes returns and issues intimations. If the processing results in a demand (for example, due to disallowed deductions or unmatched TDS), that demand stays on your record until you pay it, get it rectified, or dispute it.

6. Mismatch between old and new tax regime selection

If you filed under the new tax regime but claimed deductions only available under the old regime (such as Section 80C or Section 80D), CPC will disallow those deductions during processing, creating a demand. Similarly, if you opted for the old regime but did not file Form 10-IEA on time, the return may be processed under the default new regime, altering your tax liability.

ITR season context: Between June and September, CPC processes a surge of returns. Section 245 intimations peak during this window because refunds from newly processed returns are matched against existing demands in the system. If you filed early in the season, expect the intimation within 30 to 60 days of your return being processed.

How to Check Outstanding Demands on the e-Filing Portal

Before responding to a Section 245 notice, review the demand details on the portal.

Step-by-Step Guide

Steps to Check Outstanding Tax Demand

Log in to the e-filing portal

Go to incometax.gov.in/iec/foportal/ and log in with your PAN and password. Complete OTP verification.

Navigate to Pending Actions

After login, click on 'Pending Actions' in the top navigation or dashboard.

Select Response to Outstanding Tax Demand

Click on 'Response to Outstanding Tax Demand.' This page lists all demands raised against your PAN, with assessment year, demand amount, and status.

Review the demand details

Click on the relevant assessment year to see the full demand breakdown: original demand amount, interest, and the section under which it was raised (143(1), 143(3), 144, etc.).

Cross-check with your records

Compare the demand against your filed return, Form 26AS, AIS, and any rectification or appeal already filed. Identify whether the demand is correct, partially correct, or entirely wrong.

How to Respond to a Section 245 Notice

You have three options when responding. The response must be submitted within 30 days of the date of the intimation.

Option 1: Demand Is Correct, Agree to Adjustment

If you review the demand and find it is legitimate (for example, you forgot to pay self-assessment tax or the TDS credit genuinely does not apply), you can agree to the adjustment. The department will adjust your refund against the demand. If the refund exceeds the demand, the balance is credited to your bank account. If the demand exceeds the refund, you will need to pay the remaining balance separately.

How to submit:

1. Go to Pending Actions on the e-filing portal.
2. Select Response to Outstanding Tax Demand.
3. Choose the relevant assessment year.
4. Select "Demand is correct."
5. Submit.

Option 2: Demand Is Partially Correct

If part of the demand is valid but part of it is not (for example, the tax amount is correct but the interest calculation is wrong), select "Demand is partially correct." You will need to specify which portion you accept and which portion you dispute.

How to submit:

1. Follow the same navigation as Option 1.
2. Select "Demand is partially correct."
3. Enter the amount you accept as correct.
4. Provide reasons for disputing the remaining amount.
5. Upload supporting documents if applicable (revised computation, TDS certificate, challan receipts).
6. Submit.

Option 3: Demand Is Incorrect, Disagree Fully

If the demand is entirely wrong (for example, it was raised because TDS credit was not given during processing, but your Form 26AS clearly shows the TDS), you can disagree with the full demand.

How to submit:

1. Follow the same navigation as Option 1.
2. Select "Demand is incorrect."
3. Provide detailed reasons for disagreement.
4. Upload supporting documents: Form 26AS screenshot, AIS entries, challans for tax already paid, or the rectification order if one was already issued.
5. Submit.

Documents to Keep Ready Before Responding

Regardless of which option you choose, gather the following before submitting your response:

• Form 26AS for the assessment year in question (download from the e-filing portal or TRACES)
• Annual Information Statement (AIS) showing all reported transactions
• Challan receipts for any tax payments already made (advance tax, self-assessment tax)
• Section 143(1) intimation order from CPC for the relevant assessment year
• Rectification order (if you previously filed a rectification that resolved the demand)
• Copy of the filed ITR and the computation of income

Having these documents ready ensures your response is accurate and well-supported. If you disagree with the demand, attaching proof at the time of response strengthens your case.

What Happens If You Do Not Respond Within 30 Days

If you do not respond to the Section 245 intimation within 30 days, the Assessing Officer proceeds with the adjustment. Your refund is set off against the outstanding demand, fully or partially, without any further opportunity for you to object at that stage.

This is why the 30-day window is critical. Once the adjustment is made, reversing it requires filing a rectification under Section 154 or an appeal under Section 246A, both of which take significantly longer.

Interest calculation: Under Section 244A, interest on your refund is calculated up to the date of adjustment, not up to the date the refund would have otherwise been credited to your bank account. This means a delayed response can also reduce the interest you receive on the refund portion.

Example: Suppose your AY 2026-27 refund is Rs 45,000 and there is an outstanding demand of Rs 20,000 from AY 2024-25. If you do not respond within 30 days, the department will adjust Rs 20,000 from your refund and release the balance of Rs 25,000 (plus applicable interest computed up to the adjustment date). If that demand was actually incorrect (say, due to a TDS credit error), you would need to file a rectification after the fact to recover the Rs 20,000, which could take 2 to 4 months.

Recovery beyond refund adjustment: If the outstanding demand exceeds the refund amount, the department can initiate further recovery measures under Section 220, including attachment of bank accounts, salary, or other assets. Responding within 30 days and contesting invalid demands protects you from these escalation steps.

How to Contest an Incorrect Demand

If the demand is wrong and you disagree with the adjustment, you have two formal remedies.

Rectification Under Section 154

Section 154 allows the AO to correct any mistake apparent from the record. This is the faster route and works well when the error is straightforward.

Common scenarios where rectification works:

• TDS credit not given during processing (but reflected in Form 26AS)
• Arithmetic error in computing total income
• Deduction claimed correctly but not allowed by CPC
• Challan payment made but not credited

How to file:

1. Log in to the e-filing portal.
2. Go to Services and select Rectification.
3. Choose the assessment year.
4. Select the type of rectification (for example, "Tax credit mismatch" or "Reprocess the return").
5. Upload supporting documents if required.
6. Submit.

CPC usually processes rectification requests within 30 to 60 days. If the rectification is accepted, the demand is reduced or deleted, and any adjusted refund is reprocessed.

Appeal Under Section 246A

If the demand arises from a substantive issue (not just a processing error) and you believe the AO's assessment itself is incorrect, you can file an appeal before the Commissioner of Income Tax (Appeals), also known as CIT(A).

When to use appeal instead of rectification:

• The demand arises from a scrutiny assessment under Section 143(3)
• The AO disallowed a deduction on merits, not due to a processing error
• The issue involves interpretation of law, not just a factual mistake

How to file:

1. File Form 35 online through the e-filing portal.
2. Pay the required appeal fee (Rs 250 for income up to Rs 1 lakh, Rs 500 for income between Rs 1 lakh and Rs 2 lakh, Rs 1,000 for income above Rs 2 lakh).
3. Attach the grounds of appeal and supporting documents.
4. The appeal is heard by CIT(A) and, if needed, can be escalated to ITAT.

Common Mistakes Taxpayers Make With Section 245 Notices

1. Ignoring the notice entirely. Many taxpayers assume the demand will go away on its own. It does not. After 30 days, the adjustment happens automatically, and you lose the easiest window to respond.

2. Not checking the demand before responding. Some taxpayers agree to the adjustment without verifying whether the demand is correct. Always cross-check Form 26AS, AIS, and your filed return before accepting.

3. Confusing a Section 245 intimation with a regular notice. A Section 245 intimation is specifically about refund adjustment. It is not a demand notice under Section 156. Responding to the wrong notice type can delay resolution.

4. Not filing rectification for old demands. If you know an old demand is wrong, do not wait for a Section 245 notice to fix it. File a rectification under Section 154 proactively so the demand is cleared before your next refund is due.

5. Missing the 30-day deadline. The 30 days are counted from the date on the intimation, not the date you read the email. If the notice was issued on June 1, the deadline is June 30, regardless of when you saw it.

6. Not keeping track of paid challans. If you already paid the demand via challan but CPC did not credit it, the demand stays on record. Keep your BSR code, challan serial number, and payment date handy so you can reference them in your response.

7. Responding on the wrong assessment year. The portal lists demands by assessment year. Taxpayers sometimes respond to a demand for AY 2023-24 when the Section 245 notice relates to AY 2024-25. Double-check the assessment year on the intimation letter before submitting your response.

How Tax Garden Helps

Tax Garden's compliance team handles Section 245 responses end to end.

• Demand review: We pull your Form 26AS, AIS, and filed returns, and verify whether the outstanding demand is legitimate, partially valid, or entirely incorrect.
• Response filing: We draft and submit your response on the e-filing portal within the 30-day window, with supporting documents.
• Rectification filing: Where the demand is wrong due to a processing error, we file a rectification under Section 154 and track it until CPC processes the correction.
• Appeal support: For demands arising from assessment orders, we prepare Form 35 and the grounds of appeal for filing before CIT(A).
• Proactive monitoring: As part of our subscription plans, we monitor your demand status throughout the year so issues are resolved before they block your refund.

If you have received a Section 245 intimation, or if you want to check whether old demands are sitting on your PAN, reach out to Tax Garden before the 30-day window expires.

For a broader understanding of income tax slabs and how your total income is computed, see our detailed guide on income tax slab rates for FY 2026-27.

Frequently Asked Questions

Frequently Asked Questions

What is a Section 245 notice in income tax?

A Section 245 notice (technically, an intimation) informs you that the Income Tax Department intends to adjust your pending refund against an outstanding tax demand. The department is legally required to send this intimation before making the adjustment, giving you 30 days to respond.

How many days do I have to respond to a Section 245 intimation?

You have 30 days from the date of the intimation to respond. If you do not respond within this period, the department proceeds with the adjustment automatically.

Can the department adjust my refund without sending a notice?

No. Section 245 mandates that the AO must send an intimation before adjusting the refund. If no intimation was sent, the adjustment is procedurally invalid and can be challenged.

How do I respond to a Section 245 notice online?

Log in to the e-filing portal at incometax.gov.in, go to Pending Actions, click Response to Outstanding Tax Demand, select the assessment year, and choose whether you agree, partially agree, or disagree with the demand. Upload supporting documents and submit.

What if the outstanding demand is from a very old assessment year?

The demand remains on your record until it is paid, rectified, or deleted. Even demands from 5 or 10 years ago can block a current-year refund. File a rectification under Section 154 if the old demand is incorrect, or pay it if it is legitimate.

Does interest on my refund stop when the adjustment happens?

Yes. Under Section 244A, interest on the refund is calculated up to the date of adjustment, not up to the date the refund would have otherwise been credited to your bank account.

Can I get back money that was wrongly adjusted?

Yes. If you file a rectification under Section 154 and the demand is deleted or reduced, CPC will reprocess the refund. The excess amount adjusted will be refunded to you along with applicable interest.

I filed my ITR and my refund shows as adjusted. What should I do?

Check the demand details on the e-filing portal under Pending Actions. If the demand is incorrect, file a rectification under Section 154 immediately. If it was correct, no further action is needed. If you believe the adjustment was made without proper intimation, consult a tax professional.

Sources: Section 245 of the Income Tax Act, 1961 (set off of refunds against tax remaining payable); Section 244A (interest on refunds); Section 154 (rectification of mistake apparent from the record); Section 246A (appealable orders); Section 220(6) (stay of demand pending appeal); the Income Tax Department e-filing portal at incometax.gov.in/iec/foportal/ (response to outstanding tax demand workflow); CBDT Circular No. 530 (guidelines on collection and recovery of outstanding demand); and the CPC Bengaluru processing guidelines for Section 143(1) intimations.