When Your Refund Is Adjusted: How to Respond to an Outstanding Demand and Section 245 Notice

You filed your return in July 2025, claimed a refund of Rs 18,400, and waited. Then, instead of the money, an email lands from the Centralised Processing Centre quoting Section 245 of the Income-tax Act 1961: your refund is being set off against an old demand of Rs 27,300 from Assessment Year 2022-23. This is one of the most common refund shocks salaried taxpayers face, and in almost every case the reader has a 30-day window to respond before the adjustment is finalised. This guide walks through exactly what the notice means and how to answer it on the e-filing portal.

The Scenario

Picture a salaried professional who e-verified their ITR for FY 2024-25 on 20 July 2025 and expected a tax refund of Rs 18,400 to hit the bank account within three to four weeks. Instead, on 12 August 2025 the portal shows a "Response to Outstanding Demand" pending action, and a Section 245 intimation states that a demand of Rs 27,300 raised on 4 March 2023 for AY 2022-23 is still outstanding. The department proposes to adjust the current refund against that older figure.

The confusion is genuine: many taxpayers never saw the original demand, because it was raised in a Section 143(1) intimation two years earlier and sat unnoticed in the portal. As of the FY 2025-26 filing cycle, the Income Tax Department routes every such set-off through the "Pending Actions > Response to Outstanding Demand" screen, and the reader must actively choose one of three responses rather than let the 30-day clock run out silently.

The stakes are concrete. If the demand of Rs 27,300 is genuinely wrong but you do nothing, the entire Rs 18,400 refund is absorbed and you are still shown as owing Rs 8,900. If the demand is right and already paid, but you never uploaded the challan, the same set-off happens twice over in the department's books. Getting the response right within the window quoted in the notice is what protects the money.

Statutory Answer

Section 245 of the Income-tax Act 1961 is the enabling provision. It permits the tax authority, "in lieu of payment of the refund," to set off the amount to be refunded against any sum remaining payable under the Act by that person, but only "after giving an intimation in writing to such person of the action proposed to be taken." That written-intimation requirement is the taxpayer's core protection: the department cannot adjust a refund against a demand of Rs 27,300 without first telling you and giving you a chance to respond. The full text sits in the consolidated Act on the Government's statute portal at indiacode.nic.in.

Two points of law matter for the reader in 2026. First, the intimation is not itself a final order; it is a proposal, and the 30-day response window stated in the notice is your right to be heard before the set-off is confirmed. Second, an outstanding demand can only be legitimately set off if it is validly on the department's books, which usually means it flows from a prior Section 143(1) processing or a Section 143(3) assessment. If that underlying demand is under rectification or appeal, you are entitled to say so.

The response is filed through the official e-filing portal. The Income Tax Department's own user manual, published at incometax.gov.in, sets out the path: log in, open "Pending Actions", select "Response to Outstanding Demand", and choose your response for each demand line. There is no separate paper filing; the portal Transaction ID generated on submission is your proof that you answered within the window.

Worked Resolution

Return to the salaried professional. Their refund of Rs 18,400 for FY 2024-25 is being set off against the Rs 27,300 demand for AY 2022-23. When they open the Section 245 screen, the portal offers three mutually exclusive responses per demand. The table below maps each to what actually happens to the money.

Suppose the professional checks their records and finds the AY 2022-23 demand of Rs 27,300 arose because TDS of Rs 31,000 deducted by their employer was never matched in Form 26AS at the time of processing on 4 March 2023. That is a classic mismatch, not a real liability. The correct response is "Disagree with demand", with the reason "Demand already paid / TDS credit not given" and the deductor's TAN and the Form 26AS entry attached.

If instead the demand were genuine but already cleared, the taxpayer would pick "Demand is correct - already paid" and upload the challan. The portal requires specific challan fields, and getting them exactly right is what makes the department release the set-off. The following table lists the mandatory inputs from the official user manual.

Once submitted, the portal issues a Transaction ID; the professional should save it. If they had instead needed to pay a genuine balance, they would use the e-Pay Tax facility to clear the Rs 8,900 shortfall and generate a fresh challan. Before deciding whether the underlying tax computation was even right, it is worth re-running the numbers on Oquilia's income tax calculator and comparing regimes with the old vs new regime calculator, because a wrongly computed demand from an earlier year is exactly the kind of error Section 245 lets you contest. Matching employer TDS against your own figures using the TDS calculator often exposes the mismatch that triggered the demand in the first place.

For FY 2025-26 context, the tax arithmetic itself has shifted: the Section 87A rebate in the new regime is now Rs 60,000 for total income up to Rs 12 lakh, and the new-regime standard deduction is Rs 75,000. A demand from AY 2022-23 was computed under older rules, so any recomputation must use the parameters of that year, not today's slabs. If your grievance is procedural rather than about the demand itself, the separate e-Nivaran route we covered in how to submit a grievance on the portal runs in parallel to the Section 245 response.

FAQ

What happens if I ignore the Section 245 notice for 30 days?

If you do not respond within the window stated in the intimation, the department treats the demand as confirmed and proceeds with the set-off. In the worked example, the full Rs 18,400 refund would be adjusted against the Rs 27,300 demand automatically, and you would be left showing Rs 8,900 as payable. Silence is read as agreement, so responding before the deadline is essential.

Can I disagree with only part of the demand?

Yes. The portal explicitly allows "Disagree with demand (Either in full or Part)". If, say, Rs 15,000 of the Rs 27,300 is genuinely payable but Rs 12,300 reflects unmatched TDS, you contest the Rs 12,300 with reasons and can use "Pay Now" to clear the undisputed Rs 15,000. Only the contested portion of the refund set-off is held pending review.

What challan details do I need if the demand is already paid?

Per the incometax.gov.in user manual, you need the BSR Code, the challan Serial Number, the Date of Payment, the Challan Amount, and the Type of Payment (minor head), plus a PDF copy of the challan up to 5 MB. Using the earlier example, a BSR Code of 0510308, serial 02931 and date 18 March 2023 for Rs 27,300 must match the challan exactly, or the department will not release the set-off.

Where do I actually find the Section 245 notice on the portal?

Log in at incometax.gov.in, then open "Pending Actions > Response to Outstanding Demand". You can download the latest or an earlier Section 245 notice filtered by financial year from that screen. The AY 2022-23 demand of Rs 27,300 in our example appears as a distinct demand line with its own response options.

Does responding stop interest from accruing on the demand?

No. Interest under Section 220(2) continues to run at 1% per month on a validly outstanding demand until it is paid or deleted. If the Rs 27,300 for AY 2022-23 is ultimately upheld, interest accrues from the original due date, which is why contesting a genuinely wrong demand quickly, rather than letting it sit, protects you from an inflated figure.

Will the refund be released if I win the disagreement?

If the department accepts your reasons and deletes or reduces the demand, the set-off is reversed and the refund of Rs 18,400 is released to your validated bank account, along with any refund interest under Section 244A. Keep the Transaction ID from your Section 245 response, as it is the reference the CPC uses to track the reversal.

Can an old demand from AY 2022-23 still be adjusted years later?

Yes, as long as the demand remains validly outstanding on the department's records, Section 245 permits set-off against any later refund. This is why an unnoticed Rs 27,300 demand raised on 4 March 2023 can surface against a FY 2024-25 refund claimed in 2025. Clearing or contesting old demands promptly is the only way to stop them resurfacing.