What to do when your refund is being adjusted against an old demand under Section 245

The Scenario

You filed your return for assessment year 2026-27 and the computation showed a refund of Rs 20,100. Weeks passed, the credit never reached your bank account, and an intimation appeared instead: the refund is proposed to be adjusted against an outstanding demand of Rs 18,400 for assessment year 2021-22 — a year you had stopped thinking about, from a notice you do not remember receiving.

This is a set-off under Section 245 of the Income-tax Act 1961 — the department applying money it owes you against money its records say you owe it, for a different assessment year.

The timing is what most taxpayers get wrong. Section 245 requires a written intimation of the proposed action first, and the portal gives you a live window to contest the underlying demand before it hardens. The Income Tax Department's FAQ is blunt about the cost of silence: "If you do not respond to it, the demand will be confirmed and will be adjusted against your refund (if any) or show as demand payable against your PAN."

In the worked example below, responding rather than ignoring the intimation is worth Rs 17,760 on a Rs 18,400 demand. That gap is almost entirely interest that stopped running the day the principal was corrected.

Where the response actually lives

The response is filed on the e-filing portal at Pending Actions > Response to Outstanding Demand — not by email, and not through your bank. Interest under Section 220(2) runs at 1 per cent a month while you look for the screen.

Statutory Answer

Four provisions do the work here.

Section 245 — set-off of refunds. The operative words are that the authority "may, in lieu of payment of the refund, set off the amount to be refunded or any part of that amount, against the sum, if any, remaining payable under this Act by the person to whom the refund is due, after giving an intimation in writing to such person of the action proposed to be taken under this section." Two things follow. First, the power is discretionary ("may"), not mandatory. Second, the intimation in writing is a precondition to the set-off, not a receipt issued afterwards.

Section 156 — notice of demand. A demand exists in law only because a notice of demand under Section 156 was issued for it. The Rs 18,400 traces back to such a notice for assessment year 2021-22, served electronically to the email address then registered on the portal.

Section 220(1) and 220(2) — the clock and the meter. Section 220(1) provides that an amount specified as payable in a notice of demand under Section 156 "shall be paid within thirty days of the service of the notice". Miss that window and Section 220(2) starts a meter: "simple interest at one per cent. for every month or part of a month" from the day after the thirty days expire until the amount is paid. That is 12 per cent a year, uncompounded, running whether or not you ever opened the notice.

Section 244A — interest on your side. Section 244A(1) fixes interest on refunds "at the rate of one-half per cent. for every month or part of a month" — 0.5 per cent a month against the 1 per cent charged under Section 220(2). The asymmetry is 2:1, which is why letting an old demand sit while a fresh refund accrues is a losing trade.

Section 220(6) — the appeal safety valve. Where an appeal has been presented, the Assessing Officer "may, in his discretion" treat the taxpayer as not being in default for the disputed amount "as long as such appeal remains undisposed of". That is discretionary relief, not an automatic stay, and it does not follow merely from disagreeing on the portal.

The three responses the portal accepts

A disagreement needs a reason from the list the portal offers; where none fits, the FAQ confirms you may select Others and "enter the details for your reason". A reason with no supporting detail is the weakest response available.

Worked Resolution

Take a salaried taxpayer with gross salary of Rs 14,00,000 for financial year 2025-26, taxed under the new regime, with Rs 1,02,000 deducted as TDS through the year.

No Section 87A rebate arises: under the new regime for financial year 2025-26 the rebate runs up to Rs 60,000 where total income does not exceed Rs 12,00,000, and Rs 13,25,000 is above that threshold. Reproduce the computation with the income tax calculator, or compare regimes with the old vs new calculator.

Now the old demand. The Rs 18,400 raised for assessment year 2021-22 has been unpaid 48 months, so Section 220(2) interest at 1 per cent a month adds Rs 8,832, taking it to Rs 27,232. Of that Rs 18,400, assume Rs 12,000 was TDS your employer deducted and deposited — visible in Form 26AS — that was never credited in processing. The payable slice is Rs 6,400.

The swing is Rs 17,760, and it came from a TDS credit already in Form 26AS, not from any argument about the law. Section 220(2) interest recomputes on the corrected principal, so removing Rs 12,000 from the base also erases Rs 5,760 of interest.

One refinement. Where the refund arises out of TDS, Section 244A(1) runs interest at 0.5 per cent a month from 1 April of the assessment year until the refund is granted — on Rs 20,100 held six months, Rs 603. It forms part of the amount the set-off bites into.

Filing the response, step by step

1. Sign in to the e-filing portal and open Pending Actions > Response to Outstanding Demand.
2. Identify the demand by assessment year — Rs 18,400 against assessment year 2021-22 here — and open it before touching the current year's refund.
3. Pull Form 26AS and the annual information statement for that year and match every TDS entry against the demand. The Rs 12,000 gap is visible at this step and nowhere else.
4. Choose your response: agree and pay, disagree in full, or disagree in part. If in part, the undisputed Rs 6,400 should be paid rather than argued.
5. Select a reason; where nothing fits, choose Others and give the detail — assessment year, deductor, amount, and the document relied on.
6. Pay any agreed portion. The portal accepts net-banking, debit card and payment gateway (credit or debit card, or UPI); offline, NEFT/RTGS and pay-over-counter by cash, cheque or demand draft are available.

A payment made here is self-assessment tax or tax on a regular assessment, not advance tax — paying under the wrong head creates a fresh mismatch and, in due course, a fresh demand.

If the demand came out of an arithmetic or clerical error in processing, this screen is not your only route: a rectification under Section 154 attacks the intimation directly, covered in our guide to fixing a mistake in a 143(1) intimation. If the refund is stuck for another reason, check whether the return was flagged defective — the 15-day rule under Section 139(9) runs a much shorter clock.

FAQ

Can the department adjust my refund without telling me first?

No. Section 245 permits the set-off only "after giving an intimation in writing to such person of the action proposed to be taken under this section". The written intimation is a condition precedent. If a refund has been set off against an assessment-year 2021-22 demand with no prior intimation on record, that is the first point to raise.

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

The Income Tax Department's FAQ on responding to an outstanding demand sets out no fixed response period, so treat the date printed on your own intimation as the deadline. The thirty-day figure people often quote comes from Section 220(1) — the period for paying an amount specified in a notice of demand under Section 156, a different clock attached to the original demand.

What happens if I simply do not respond?

The FAQ states the demand "will be confirmed and will be adjusted against your refund (if any) or show as demand payable against your PAN". In the example that means the full Rs 27,232 stands, the entire Rs 20,100 refund is absorbed, and Rs 7,132 remains outstanding while Section 220(2) interest runs at 1 per cent a month.

Can I disagree with only part of the demand?

Yes. The portal allows disagreement either in full or in part, and partial disagreement is usually the honest answer where a Rs 18,400 demand contains a Rs 12,000 TDS mismatch and Rs 6,400 that is genuinely payable. Paying the undisputed slice stops interest running on it while the rest is verified.

Does filing an appeal stop the refund from being adjusted?

Not by itself. Section 220(6) gives the Assessing Officer a discretion to treat you as not in default for the disputed amount "as long as such appeal remains undisposed of" — discretion exercised on an application, not something that operates automatically when an appeal is filed.

Will I get interest on the refund that was held back?

Where the refund arises from TDS, Section 244A(1) provides interest at 0.5 per cent a month from 1 April of the assessment year to the date the refund is granted. On Rs 20,100 delayed six months that is Rs 603. Note the asymmetry: 1 per cent a month is charged under Section 220(2), 0.5 per cent paid under Section 244A.

How do I pay the part of the demand I agree with?

Online the portal accepts net-banking, debit card and payment gateway including credit or debit card and UPI; offline, NEFT/RTGS and pay-over-counter by cash, cheque or demand draft. Pay it against the correct assessment year — 2021-22 here — because a payment tagged to 2026-27 will not close the old demand and becomes a refund claim of its own.