How to respond to an outstanding demand and a Section 245 refund-adjustment intimation on the income tax portal

You filed your return on time, claimed a refund, and then an email lands from the Income Tax Department titled "Intimation under Section 245". Instead of the refund reaching your bank account, the portal says it is being adjusted against an old demand from three years ago that you barely remember. This is one of the most common refund shocks salaried taxpayers face, and the clock on your response is short: the portal confirms the demand automatically if you stay silent.

The good news is that Section 245 does not let the department seize your refund without a hearing. It requires a prior intimation and a defined response window through the "Response to Outstanding Demand" service on the e-filing portal. This guide walks through exactly what the notice means, the statutory basis under the Income-tax Act, 1961, and a worked example showing how an Rs 30,000 refund gets adjusted against an Rs 42,000 demand for Assessment Year 2023-24.

The Scenario

Picture a salaried professional, Ananya, who files her return for Assessment Year 2026-27 and computes a refund of Rs 30,000 arising from excess TDS deducted by her employer. Three weeks after filing, she receives a Section 245 intimation flagging an outstanding demand of Rs 42,000 raised for Assessment Year 2023-24, a year she believed was fully settled. The intimation states that the Rs 30,000 refund will be adjusted against that Rs 42,000 demand unless she responds.

Ananya's confusion is typical. The Rs 42,000 demand for AY 2023-24 was, in her case, created because a TDS credit of Rs 30,000 that appeared in her Form 26AS was not matched to her return during processing, inflating her tax payable. She never received the original demand notice because it went to an old email address she stopped checking in 2023. The Section 245 intimation is, in effect, the department's way of telling her: "You have money coming to you, but you also owe us; here is our proposal to net the two off."

The stakes are practical. If she ignores the intimation, the portal treats the demand as agreed, adjusts the Rs 30,000, and leaves a residual Rs 12,000 shown as payable, with interest continuing to accrue under Section 220(2) at 1% for every month or part of a month. If she responds correctly, she can either pay a demand she genuinely owes or contest one that arose from a processing error, such as an unmatched TDS credit visible in her Form 26AS and TDS records.

Statutory Answer

The power to adjust a refund against an existing demand sits in Section 245 of the Income-tax Act, 1961 ("Set off of refunds against tax remaining payable"). It permits the Assessing Officer to set off the amount of a refund against any sum remaining payable under the Act, but only after giving the taxpayer prior written intimation of the proposed action. This prior-intimation safeguard is the reason you receive a notice rather than simply seeing your refund vanish (see the bare Act text on indiacode.nic.in).

The underlying demand itself is raised through a notice of demand under Section 156, and Section 220(1) requires that any sum specified in such a notice is payable within 30 days of service. Once that window lapses, Section 220(2) imposes simple interest at 1% for every month or part of a month during which the default continues. So an old, unpaid demand does not stay frozen at its original figure; it compounds monthly until cleared or successfully disputed (statutory basis: indiacode.nic.in).

The operational response is handled entirely online. Per the Income Tax Department's "Respond to Outstanding Demand" FAQ, you access the service through Pending Actions > Response to Outstanding Demand on the e-filing portal. If you do not respond, the demand is confirmed and adjusted against your refund, if any, or shown as payable. The FAQ also confirms you can download the Section 245 intimation itself from that same page (source: incometax.gov.in).

Your response options are prescribed. You may click Agree and pay the demand, or Disagree with the demand either in full or in part. Disagreement requires you to click Add Reasons and pick from the listed reasons, such as "Demand paid", "Rectification / revised return filed", or "TDS mismatch", or choose Others. Critically, where you disagree only in part, the FAQ makes clear you must pay the undisputed portion; you cannot park the entire amount while contesting only a slice of it.

Worked Resolution

Return to Ananya. Her AY 2026-27 return, filed under the new regime for FY 2025-26, showed a refund of Rs 30,000. The Section 245 intimation proposes adjusting that refund against the AY 2023-24 demand of Rs 42,000. Here is how the arithmetic and the decision play out.

Step 1 — Understand the adjustment maths. If she does nothing, the portal nets the refund against the demand as follows:

The Rs 30,000 refund is consumed entirely, and Rs 12,000 remains payable, continuing to attract 1% monthly interest under Section 220(2). This is the default outcome of silence.

Step 2 — Diagnose the demand. Ananya pulls up the AY 2023-24 record and finds the Rs 42,000 demand was created solely because a Rs 30,000 TDS credit in her Form 26AS was not adopted during processing. The genuine shortfall, after correctly crediting that TDS, is only Rs 12,000. She therefore has a partial disagreement: Rs 12,000 is correctly payable, Rs 30,000 is not.

Step 3 — Respond correctly. She goes to Pending Actions > Response to Outstanding Demand, selects the AY 2023-24 demand, and chooses "Disagree with demand (Partially)". She clicks Add Reasons, selects "TDS mismatch", and must pay the undisputed Rs 12,000 before submitting. The response then reads:

Once she pays the undisputed Rs 12,000 and the disputed Rs 30,000 is resolved on the TDS-credit ground, the AY 2026-27 refund of Rs 30,000 is no longer needed to satisfy the demand and can be released to her bank account.

To put the numbers in context, consider how the underlying tax that generates a refund or demand is computed. A salaried taxpayer with a gross salary of Rs 14,00,000 under the new regime for FY 2025-26 works out as follows:

Because taxable income of Rs 13,25,000 exceeds the Rs 12,00,000 threshold, the Section 87A rebate of Rs 60,000 does not apply here (it is available only when total income is up to Rs 12,00,000 in the new regime for FY 2025-26). If the employer had deducted more than Rs 81,900 as TDS across the year, the excess becomes a refund exactly like Ananya's Rs 30,000; if it deducted less, a demand can arise. You can reproduce this computation on the Income Tax Calculator and compare regimes using the old vs new regime tool.

The practical lesson from Ananya's case: never let a Section 245 intimation lapse into silence. A demand that is 70% a processing error (Rs 30,000 of Rs 42,000) would otherwise swallow a fully legitimate refund. For a broader primer on how refunds are determined and released, see our glossary entries on tax refund and self-assessment tax, and on how the return itself is filed at ITR.

FAQ

How long do I have to respond to a Section 245 intimation?

The Section 245 intimation is a prior notice of the department's intention to adjust your refund, and you should respond promptly through Pending Actions > Response to Outstanding Demand. Per the incometax.gov.in FAQ, if you do not respond, the demand is confirmed and adjusted against your refund, if any, or shown as payable. Treat it with the same urgency as the underlying Section 156 notice, where Section 220(1) allows only 30 days for payment before 1% monthly interest begins under Section 220(2).

What happens if I ignore the intimation entirely?

Silence is treated as agreement. The portal confirms the demand and adjusts it against any refund due, then shows any residual as payable. In Ananya's example, ignoring the notice would have adjusted her full Rs 30,000 refund against the Rs 42,000 demand, leaving Rs 12,000 payable with interest running at 1% for every month or part of a month under Section 220(2) (statutory basis: indiacode.nic.in).

Can I disagree with only part of the demand?

Yes. The incometax.gov.in FAQ confirms you may disagree with the demand either in full or in part by clicking Add Reasons and choosing a listed reason or Others. Where you disagree in part, you must pay the undisputed portion before submitting. Ananya paid the undisputed Rs 12,000 and disputed the remaining Rs 30,000 on a TDS-mismatch ground for AY 2023-24.

What reasons can I select when I disagree?

The portal lists standard reasons including "Demand paid", "Rectification / revised return filed", "TDS mismatch", and an "Others" free-text option, per the incometax.gov.in FAQ. Ananya selected "TDS mismatch" because her Rs 30,000 TDS credit in Form 26AS had not been adopted during the original processing for AY 2023-24. Choose the reason that matches your documentary evidence.

Where do I download the actual Section 245 notice?

The incometax.gov.in "Respond to Outstanding Demand" FAQ confirms the Section 245 intimation can be downloaded directly from the Response to Outstanding Demand page under Pending Actions. Keep this PDF, because it records the exact demand amount, the assessment year (AY 2023-24 in Ananya's case), and the proposed adjustment against your current refund.

Does interest keep accruing while I dispute the demand?

Yes, on any portion that ultimately stands. Section 220(2) charges simple interest at 1% for every month or part of a month for as long as an amount specified in a Section 156 notice remains unpaid beyond the 30-day window under Section 220(1) (see indiacode.nic.in). This is why paying the undisputed Rs 12,000 immediately, as Ananya did, stops interest running on the part you concede.

How is the refund that gets adjusted actually calculated?

A refund arises when TDS and advance payments exceed your final liability. For the salaried taxpayer earning Rs 14,00,000 under the new regime for FY 2025-26, the liability is Rs 81,900 after a Rs 75,000 standard deduction and 4% cess; any TDS above that becomes a refund. Verify your own figure on the Income Tax Calculator and cross-check the tax withheld using the TDS calculator against your Form 26AS.