Section 245 Intimation: How to Respond When Your Refund Is Adjusted Against Outstanding Demand

You filed your income-tax return for AY 2026-27 expecting a refund of a few thousand rupees, and instead an email lands in your inbox headed "Intimation under Section 245". It says the refund will be set off against an outstanding demand from an earlier year. This is one of the most common ITR-season surprises, and it is entirely procedural: Section 245 of the Income-tax Act 1961 lets the department adjust a refund due to you against tax you still owe. What matters is that you get 30 days to respond on the e-filing portal before the set-off is finalised. Handle it correctly and you keep control of every rupee; ignore it and the demand is confirmed automatically.

This Q&A walks through exactly what a Section 245 intimation means, the statute behind it, your three response options, and a worked example using FY 2025-26 slabs so you can see the arithmetic of a real set-off.

The Scenario

Consider Meera, a salaried professional in Pune. Her employer over-deducted TDS during FY 2025-26, so her return for AY 2026-27 computes a tax refund of Rs 30,000. Before that refund reaches her bank account, the Centralised Processing Centre flags an old outstanding demand of Rs 12,000 for AY 2020-21, raised because a TDS credit was not matched in that year. On 6 July 2026 she receives an intimation under Section 245 proposing to adjust the Rs 12,000 demand against her Rs 30,000 refund.

Meera's instinct is to panic, but the intimation is not a penalty notice and it is not a scrutiny ITR assessment. It is a set-off proposal. She has three routes: agree and let the Rs 12,000 go, disagree because she believes the AY 2020-21 demand is wrong, or partially agree. The clock, however, is real: the portal gives her 30 days from the date of the intimation, and if she does nothing the Rs 12,000 is treated as confirmed and deducted from her refund. Every taxpayer who sees a refund shrink between the "refund determined" and "refund paid" stages is almost always looking at a silent Section 245 adjustment that went unanswered.

Statutory Answer

The power itself comes from Section 245 of the Income-tax Act 1961, which permits the assessing officer, or any authority dealing with the refund, to set off the amount of a refund against any sum remaining payable under the Act by the person to whom the refund is due. Crucially, the section requires that the taxpayer be given prior intimation in writing of the proposed action. That is the "Intimation under Section 245" you receive. The statutory text is available on the government portal India Code (indiacode.nic.in).

The requirement of prior intimation is not a courtesy; it is enforceable. In Court On Its Own Motion v. Union of India (2013) 352 ITR 273, the Delhi High Court held that the department cannot mechanically adjust refunds against demands without first following Section 245, and directed that taxpayers be given a genuine opportunity to respond before any set-off. An adjustment made without that prior intimation is liable to be reversed. You can read the judgement on indiankanoon.org.

The operational mechanics sit on the e-filing portal. As the Income Tax Department's outstanding-demand FAQ (incometax.gov.in) sets out, you view and answer the notice under Pending Actions > Response to Outstanding Demand. The three response options are fixed:

If you disagree, the portal asks you to select a predefined reason (for example "Demand paid", "Rectification / revised return filed", "Appeal filed", or "TDS credit not given") or to pick "Others" and type an explanation. Email and SMS alerts are sent at each stage, and payment, where you do agree, can be made by net-banking, debit card, NEFT/RTGS or over the counter, per the same departmental FAQ.

One number worth holding on to: while the set-off is being decided, the refund still carries interest. Section 244A of the Income-tax Act 1961 provides interest at 0.5% per month (6% per annum) on the refund due, computed up to the date the refund is granted. So a delay caused by a genuine dispute does not cost you the time value of the released portion.

Worked Resolution

Take Meera's figures and follow the money. Her FY 2025-26 salary and the refund arise as follows, computed on the new-regime slabs. Assume a gross salary of Rs 15,00,000 and no other income.

The Rs 75,000 standard deduction and the FY 2025-26 slab structure both hold only in the new regime; you can reproduce this line by line in the income-tax calculator and confirm the withholding using the TDS calculator. Because her taxable income of Rs 14,25,000 exceeds Rs 12,00,000, the Section 87A rebate (Rs 60,000 in the new regime for income up to Rs 12,00,000 in FY 2025-26) does not apply, which is why a real liability of Rs 97,500 arises.

Now the Section 245 set-off against the Rs 12,000 demand for AY 2020-21, under each response:

The arithmetic is simple subtraction: Rs 30,000 minus whatever is adjusted equals what hits her bank account. If Meera agrees, Rs 18,000 is released. If she disagrees and the AY 2020-21 demand truly stems from a TDS mismatch, she selects "TDS credit not given", checks her Form 26AS and Annual Information Statement, and if the credit is genuinely missing she asks the deductor to file a corrected TDS return so the credit reflects against her PAN; the full Rs 30,000 is then released once the demand is dropped. If part of the demand is correct, partial agreement lets her settle Rs 4,000 and keep Rs 8,000 open without holding up the other Rs 26,000.

The practical takeaway is to always open the demand and read the assessment year and section before choosing. A demand for AY 2020-21 that you have already paid, or that arose from a return you later revised, should be disagreed with the correct predefined reason, not agreed to for the sake of speed. Deciding which regime minimises your liability in the first place, and thus how large a refund you are even due, is worth a two-minute check on the old-versus-new regime calculator before you file. And if a set-off leaves a balance refund that later fails to credit, the fix is a refund reissue request, not a fresh return.

FAQ

What happens if I miss the 30-day window on a Section 245 intimation?

If you do not respond within the window specified in the intimation (30 days on the current portal), the demand is confirmed and the department proceeds with the set-off, per the Income Tax Department's outstanding-demand FAQ (incometax.gov.in). The adjusted amount is deducted from your refund, and any balance is released. You can still contest the underlying demand afterwards through rectification or appeal, but you lose the chance to stop the automatic adjustment.

Can I respond to a Section 245 intimation after the refund is already adjusted?

You can still act on the demand itself even after adjustment, for example by filing a rectification under the relevant provision or an appeal, but reversing a completed set-off is slower than preventing it. This is precisely why the Delhi High Court in Court On Its Own Motion v. Union of India (2013) 352 ITR 273 insisted on prior intimation and a real opportunity to respond before the adjustment is made.

Do I lose interest on my refund if I dispute the demand?

No. Under Section 244A of the Income-tax Act 1961, interest at 0.5% per month runs on the refund due up to the date it is granted, so a delay caused by a genuine dispute does not erase the time value of the released amount. The interest is computed by the department when the balance refund is finally paid.

The demand shows up for a year I never received a notice for. Is that valid?

The demand may be old and system-generated, but you are still entitled to see the assessment year, section and amount before any set-off, and to disagree with a reason such as "Demand paid" if you have proof. Check your self-assessment tax challans and Form 26AS for that year; if the payment was made but not tagged, the demand is a mismatch you should disagree with rather than accept.

Can only part of my refund be adjusted?

Yes. If the demand is Rs 12,000 and the refund is Rs 30,000, only Rs 12,000 is set off and Rs 18,000 is released, as shown in the worked example above. Section 245 permits set-off only to the extent of the sum payable, so a refund larger than the demand always leaves a balance to be paid out to you.

Should I just agree to a small demand to speed up my refund?

Only if the demand is genuinely correct. Agreeing to a wrong demand of even Rs 5,000 means paying tax you do not owe, and it is often no faster than disagreeing with the right predefined reason. Read the assessment year and section first, cross-check against Form 26AS and your filed returns, and agree only when the demand matches your own records.

How do I stop this from recurring next year?

Reconcile your TDS every year: match the credits in Form 26AS and the AIS against your Form 16 and interest certificates before you file, so no genuine credit is left unclaimed and no phantom demand is created. Filing an accurate return the first time, and using the income-tax calculator to confirm your liability, is the cleanest way to avoid a Section 245 intimation altogether.