Responding to an Outstanding Tax Demand and Section 245 Refund Adjustment Notices

You e-verified your income-tax return for AY 2026-27 on 12 July 2026, saw an "ITR processed" status a few weeks later, and waited for the refund to land in your bank account. Instead, an alert appeared on the e-filing portal: an intimation under Section 245 of the Income-tax Act 1961, proposing to set off your refund against an "outstanding demand" from an earlier assessment year you thought was long closed. This piece walks through exactly what that notice means and how to respond, using the process published by the Income Tax Department and a worked example computed on FY 2025-26 slabs.

The Scenario

Section 245 notices are among the most common reasons a refund stalls. The mechanics are simple but easy to get wrong: the department holds your current-year refund and points to a demand raised in an earlier year (say AY 2023-24), then gives you a defined window to respond before adjusting the two against each other. The demand may be genuine, already paid, or plainly incorrect - and each of those states needs a different answer on the portal.

Consider a salaried reader with a gross salary of Rs 16,00,000 for FY 2025-26 whose employer deducted Rs 1,40,000 in TDS. On the new regime, that return computes to a refund of Rs 26,900 (worked out in full below). The reader then finds a Section 245 intimation flagging a Rs 18,000 demand for AY 2023-24. The question is not academic: respond correctly and the full Rs 26,900 can still be released; do nothing and only Rs 8,900 reaches the bank after the Rs 18,000 set-off.

Statutory Answer

Section 245 carries the marginal heading "Set off of refunds against tax remaining payable". It empowers the department to adjust a refund due in one year against a demand outstanding in another - but, crucially, only after giving the taxpayer an intimation and an opportunity to respond. The statutory text is on India Code, and the operational procedure is documented in the Income Tax Department's user manual.

You respond through the e-filing portal at Pending Actions > Response to Outstanding Demand. Both the latest Section 245 notice and any earlier notices are downloadable from that page, so you can read the exact demand reference and assessment year before you commit to an answer. The portal offers three response options, and choosing the wrong one is the single most common cause of a refund being held longer than necessary.

Where the demand is correct but you have already cleared it, the portal asks you to attach proof of payment. You enter the challan details so the system can reconcile your payment against the open demand: the type of payment (the minor head), the challan amount, the BSR code, the challan serial number and the date of payment. Getting these five fields right is what closes the demand cleanly rather than leaving it "part paid" and eligible for adjustment.

The consequence of silence is spelled out clearly in the department's process: if no response is filed within the window shown on the notice, the demand is confirmed and adjusted against any refund due. There is no separate hearing - the notice itself is the opportunity to respond that Section 245 requires.

Worked Resolution

Take the reader from the scenario. Under the new regime for FY 2025-26, gross salary of Rs 16,00,000 is reduced by the Rs 75,000 standard deduction to a taxable income of Rs 15,25,000. Applying the FY 2025-26 new-regime slabs (nil up to Rs 4,00,000, 5% from Rs 4,00,000 to Rs 8,00,000, 10% from Rs 8,00,000 to Rs 12,00,000, and 15% from Rs 12,00,000 to Rs 16,00,000) produces the following:

Because the taxable income of Rs 15,25,000 exceeds the Rs 12,00,000 threshold, the Section 87A rebate - now Rs 60,000 in the new regime for FY 2025-26 - does not apply here. Against a total liability of Rs 1,13,100, the Rs 1,40,000 already deducted as TDS leaves a refund of Rs 26,900. You can reproduce this figure on Oquilia's income-tax calculator and cross-check the deducted amount on the TDS calculator; if you are still weighing regimes, the old-vs-new comparison shows the same salary both ways.

Now overlay the Section 245 notice: a Rs 18,000 demand for AY 2023-24. Your action determines the outcome.

The lesson is arithmetic: the Rs 18,000 difference between a Rs 26,900 and an Rs 8,900 refund turns entirely on whether you respond and which option you pick. If the demand was settled in an earlier year, entering the BSR code and challan serial number recovers the full Rs 26,900. If the demand itself is a CPC error - a mismatch in TDS credit, or a figure the intimation got wrong - the disagreement route is correct, and a parallel rectification request under Section 154 fixes the underlying record so the demand does not resurface next year.

One practical sequencing note: respond to the Section 245 intimation before its stated deadline even if you also file a Section 154 rectification, because the two run on separate timelines. The Section 245 window is what stops the automatic set-off; the rectification corrects the demand at source. Reading the Section 80U flat deduction guide is a reminder that many demands trace back to a deduction claimed in the return but not reflected in the department's records - so keep the supporting proof for every deduction you claim.

FAQ

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

The response window is shown on the notice itself under Pending Actions > Response to Outstanding Demand, and is commonly 30 days. If no response is filed within that window, the demand is treated as confirmed and adjusted against any refund due, so the safe practice is to open the notice the day the alert appears rather than waiting.

What are my three response options?

Demand is correct; Disagree with demand (in full or in part); and Demand is correct but pending payment. In the worked example, selecting "Demand is correct but pending payment" and entering a valid challan is what preserves the full Rs 26,900 refund instead of the reduced Rs 8,900.

What challan details do I need if I have already paid?

Five fields: the type of payment (minor head), the challan amount, the BSR code, the challan serial number and the date of payment. These let the system match your earlier payment to the open demand and close it, rather than leaving a Rs 18,000 balance eligible for set-off.

Can I download the Section 245 notice?

Yes. Both the latest and earlier Section 245 notices are downloadable from the Response to Outstanding Demand page, which is essential for confirming the exact assessment year - AY 2023-24 in the example - and the demand reference number before you respond.

What happens if I simply ignore the notice?

The demand is confirmed and the refund is adjusted against it. Concretely, the Rs 26,900 refund in the example is reduced to Rs 8,900 after the Rs 18,000 demand is set off, with no separate hearing beyond the notice itself.

The demand looks wrong. What should I select?

Choose "Disagree with demand" (full or part) and state your reasons. Where the demand stems from a mistake apparent on the CPC intimation, file a rectification request under Section 154 in parallel so the record is corrected at source.

Does responding guarantee my full refund?

No. Responding stops an automatic set-off and puts your position on record, but where the demand is genuinely due the refund is still adjusted - Rs 8,900 in the example. A response only preserves the full Rs 26,900 where the demand was already paid or is successfully shown to be incorrect.