Outstanding Tax Demand and a Section 245 Notice? Your Three Response Options on the e-Filing Portal

You logged into the e-filing portal to check on a pending refund and instead found a red banner: an outstanding tax demand, plus a Section 245 intimation warning that your refund is about to be adjusted against it. Under the Finance Act 2023 amendment effective 1 April 2023, the department must give you 30 days to respond before any such set-off happens. This guide walks through the three response options the portal offers and the exact statutory basis for each.

The Scenario

Here is the situation thousands of taxpayers face each assessment season. Suppose you filed your return for AY 2025-26 expecting a tax refund of Rs 18,000. Before that refund is released, the Centralised Processing Centre (CPC) flags an old demand of Rs 42,000 sitting against AY 2022-23 — perhaps from a Section 143(1) intimation you never acted on. The portal now shows this under Pending Actions > Response to Outstanding Demand, and a Section 245 notice tells you the Rs 18,000 will be set off against the Rs 42,000 unless you respond within 30 days.

The instinct to ignore it is the costliest mistake. Once 30 days lapse without a response, the adjustment proceeds automatically under Section 245, and interest under Section 220(2) keeps accruing on the unpaid balance at 1% per month. Whether the demand is genuine, already paid, or simply wrong, the portal gives you a structured way to respond — but each path carries different documentary requirements. Before you click anything, download the demand notice for the relevant financial year from the same screen so you can see exactly which assessment year and which section raised it.

Statutory Answer

The legal machinery here rests on three sections of the Income Tax Act, 1961.

Section 156 is the starting point: when any tax, interest, penalty or other sum is payable as a result of an order, the Assessing Officer serves a notice of demand. This is the formal document that converts an assessment outcome into a recoverable debt.

Section 220(1) then fixes the clock: the amount specified in a notice of demand under Section 156 must be paid within 30 days of service of the notice. Section 220(2) is the penalty for missing that window — simple interest at 1% for every month or part of a month from the end of the 30-day period until the amount is actually paid. There is no upper cap on this interest, which is why old demands balloon.

Section 245 is the set-off provision. It empowers the department, "in lieu of payment of refund", to set off the amount to be refunded against any sum remaining payable by the taxpayer. The Finance Act 2023 inserted sub-section 245(2), making it mandatory to give the taxpayer prior intimation in writing of the proposed adjustment. The portal operationalises this as the 30-day response window. If you disagree and the matter is referred to the Assessing Officer, the AO must, within 30 days of the reference, decide whether the set-off should proceed.

A demand can also be wrong on the facts — most commonly because TDS credit was not given despite appearing in Form 26AS, or because an earlier challan was not mapped. In those cases the cure is Section 154 rectification (correction of a mistake apparent from the record), which you can file separately and then cite as a reason for disagreement. You can confirm the precise wording of each section at indiacode.nic.in.

Worked Resolution

The portal presents three mutually exclusive responses. The table below maps each to its statutory trigger and the proof you must attach.

Caution: the portal removed the standalone "Demand is correct but disagree with the interest" route in favour of granular reasons under the disagreement option, so read each reason carefully before selecting.

Now the arithmetic. Take the Rs 42,000 demand for AY 2022-23. Assume the notice of demand under Section 156 was served and the 30-day Section 220(1) window expired on 30 June 2024. By the time you respond on 25 April 2026, the default has run for 22 months. Section 220(2) interest at 1% per month or part of a month works out as follows.

So if the demand is genuine, selecting "Demand is Correct" and paying the residual Rs 33,240 through the e-Pay Tax service closes the matter. If you believe the Rs 42,000 itself is wrong — say Rs 30,000 of it stems from TDS credit denied despite appearing in your TDS records — you would instead choose the disagreement option, select "Demand is partially incorrect", quantify the disputed Rs 30,000, and attach Form 26AS plus the Section 154 rectification acknowledgement. The undisputed Rs 12,000 would still need to be paid.

To pressure-test whether a fresh demand is even arithmetically right, recompute your liability on Oquilia's income tax calculator and, if you are weighing regimes, the old vs new regime calculator. For salary cases where the demand is driven by short-deducted TDS, the TDS calculator helps you reconcile what your employer deposited against what the demand assumes. Many AY 2025-26 demands also vanish once you apply the correct Section 87A rebate, which is now Rs 60,000 in the new regime for income up to Rs 12 lakh — covered in our explainer on the Section 87A rebate for FY 2025-26.

If the demand survives your disagreement and you intend to litigate, you can request a stay and represent your case through the faceless system — our walkthrough on responding via e-Proceedings explains adjournments and video-conference hearings. And whenever you do pay, generate the challan correctly: see our guide on e-Pay Tax challan (CRN) validity and payment modes, because a CRN expires 15 days after generation.

A final practical note on timing: under Section 220(2A) the Principal Commissioner has discretion to reduce or waive Section 220(2) interest in genuine-hardship cases, but only if payment of the interest would cause genuine hardship, the default was beyond your control, and you cooperated in recovery. This is an exception, not a right, so do not bank on it.

FAQ

What happens if I do not respond to the Section 245 notice within 30 days?

The adjustment proceeds automatically. Under Section 245 read with the Finance Act 2023 amendment, the 30-day window is your only chance to object before the refund is set off. After that, the department applies the refund against the outstanding demand and Section 220(2) interest at 1% per month continues on any unpaid balance.

The demand shows tax I already paid years ago. How do I clear it?

Use the "Yes, Already paid and Challan has CIN" option under Pending Actions > Response to Outstanding Demand. Enter the BSR code, challan serial number, payment date, amount and the CIN, then upload the challan as proof. The CPC maps the self-assessment tax challan to the demand and closes it once verified.

Can I dispute only part of a demand?

Yes. Choose "Disagree with Demand (Either in Full or Part)", then "Demand is partially incorrect". You enter the exact disputed amount and select reasons such as rectification filed, appeal effect pending, or TDS credit not given. The undisputed portion remains payable within the Section 220(1) period to avoid further Section 220(2) interest.

Is the 1% per month interest under Section 220(2) capped?

No. Section 220(2) imposes simple interest at 1% for every month or part of a month with no statutory ceiling, which is why dormant demands grow steeply. Only Section 220(2A) allows the Principal Commissioner to reduce or waive it, and only on proof of genuine hardship, circumstances beyond your control, and cooperation in recovery.

My demand arose from a TDS mismatch in Form 26AS. What is the right route?

File a Section 154 rectification for the relevant assessment year, attach Form 26AS and the AIS showing the credit, then disagree with the demand citing "Rectification filed" and "TDS credit not given". Reconcile the figures first using the TDS calculator so your claimed credit matches the records.

Will responding to the demand stop my current-year refund from being adjusted?

Only if you disagree and the Assessing Officer accepts your objection. Merely responding does not freeze the set-off; the AO has 30 days from the reference to decide whether the adjustment should proceed under Section 245. If you accept the demand as correct, the refund will be applied against it.

Where can I verify the exact statutory wording?

The full text of Sections 156, 220 and 245 of the Income Tax Act, 1961 is available at indiacode.nic.in, and the step-by-step portal process is documented in the e-filing user guide at incometax.gov.in under "Response to Outstanding Demand".