How to Respond to an Outstanding Tax Demand on the Income Tax e-Filing Portal

Few things unsettle a taxpayer more than logging into the Income Tax e-Filing portal and finding a red Outstanding Demand flag under Pending Actions. The good news: since Assessment Year 2019-20, the Central Board of Direct Taxes has made every demand fully contestable online, and you have a statutory 30-day window under Section 220(1) of the Income Tax Act 1961 to act before interest begins to bite. This guide walks a salaried taxpayer through exactly how to respond, what each of the three options means, and how the 1% per month interest under Section 220(2) is computed.

If you are still reconciling your figures, keep the Income Tax Calculator and your Form 26AS open in a second tab so you can match the demand against what you actually owe before you click anything. A demand you agree with costs 1% a month once the 30 days lapse; a demand you dispute costs nothing but your time, so the five minutes spent reconciling first is the highest-return work you will do all week.

The Scenario

Meet Rahul, a salaried professional earning a gross salary of Rs 14,00,000 in FY 2024-25. His employer deducted and deposited Rs 90,000 as TDS, but when the Centralised Processing Centre (CPC) processed his return under Section 143(1), it raised an outstanding demand of Rs 30,000. Rahul receives an intimation on his registered email dated 12 May 2026 and sees the demand on the portal the same day.

Two distinct situations hide behind that single red flag. Either the demand is genuine (Rahul under-reported income or claimed a deduction he cannot substantiate) or it is a processing artefact (a TDS credit not picked up because of an Annual Information Statement mismatch). The response you file must match the reality, because the wrong choice either costs you interest at 12% annualised or leaves a valid credit unclaimed. Rahul has until 11 June 2026 to respond, being 30 days from the service of the notice of demand under Section 156.

Statutory Answer

The framework rests on three sections of the Income Tax Act 1961. Section 156 empowers the Assessing Officer or CPC to serve a notice of demand whenever any tax, interest, penalty or fine is payable as a result of an order. Section 220(1) then gives the taxpayer 30 days from the service of that notice to pay the sum. Miss it, and Section 220(2) charges simple interest at 1% for every month or part of a month during which the default continues, calculated from the day the 30-day period expires.

Two further provisions matter. Section 220(2A) lets the Principal Commissioner or Commissioner waive or reduce that interest in genuine-hardship cases, subject to conditions. And Section 245 authorises the department to set off any refund due to you against an outstanding demand, but only after giving you a written intimation and an opportunity to respond within the period stated in that intimation. If you ignore a Section 245 intimation, the refund is adjusted automatically.

The portal operationalises all of this through a single workflow. Per the official Respond to Outstanding Demand user manual on incometax.gov.in, the path is Dashboard > Pending Actions > Response to Outstanding Demand, and the response is captured under one of three heads. A registered login with a valid user ID and password is mandatory; there is no offline substitute for a CPC-raised demand.

It helps to remember why the 30-day clock matters so much. A notice of demand under Section 156 is the trigger event: the moment it is served (electronic service on the e-Filing portal counts as valid service under Section 282), the Section 220(1) period starts. Pay within those 30 days and your liability is exactly the demand amount, not a rupee more. Cross the line and the arithmetic changes, because Section 220(2) treats even a single day into a new month as a full month for the 1% charge. That asymmetry is deliberate: it rewards prompt reconciliation and penalises delay, so the discipline of responding early is worth real money.

Worked Resolution

Return to Rahul. On checking his self-assessment tax records and Form 26AS, he confirms the Rs 90,000 TDS is fully reflected, so the Rs 30,000 demand stems from a deduction under Section 80C that CPC disallowed for want of proof. The demand is therefore genuine. He chooses "Demand is Correct, Not paid yet" and pays through e-Pay Tax on 20 May 2026, well inside the 30-day window ending 11 June 2026. Because he pays before the deadline, no Section 220(2) interest applies.

Now consider a costlier timeline. Suppose Rahul had ignored the notice and paid only on 25 September 2026. The 30-day window expired on 11 June 2026, so the default runs from June through September, part-months counting as full months. The interest at 1% per month compounds nothing but adds up quickly, and the portal will not let the demand close until the interest is cleared too.

Had the Rs 30,000 instead been a TDS mismatch (credit not granted because the deductor filed a defective TDS return), Rahul would pick "Disagree with the demand," add the reason "Tax Credit u/s 143(1) mismatch," and upload the relevant Form 16 and 26AS extract rather than pay a rupee. The TDS Calculator helps him confirm the correct deducted figure before he files that disagreement. Where the dispute is only partial, the portal insists he pay the undisputed slice through e-Pay Tax before submitting, so a Rs 30,000 demand of which only Rs 8,000 is genuinely due would need that Rs 8,000 paid up front.

For the "already paid" route, the manual is precise about what CPC needs to trace your money. You must enter the Type of Payment (minor head), the Challan Amount, the BSR Code, Serial Number and Date of Payment, and upload a PDF copy of the challan of at most 5 MB. Every submission generates a Transaction ID; save it, because it is your proof that you responded within the statutory window. Taxpayers still weighing whether the underlying liability was even correct should re-run the numbers on the Old vs New Regime Calculator, since a demand sometimes traces back to filing under the wrong regime for the relevant assessment year.

FAQ

What happens if I do nothing about an outstanding demand?

The demand does not disappear. Interest at 1% per month accrues under Section 220(2) from the day the 30-day Section 220(1) window closes, and under Section 245 the department can adjust any future refund against the unpaid amount after intimation. Persistent default can also lead to recovery proceedings and treatment as an "assessee in default" under Section 220(4).

Can I pay an outstanding demand in instalments?

There is no automatic instalment facility on the portal, but Section 220(3) allows the Assessing Officer, on a written application filed before the 30-day period expires, to extend time or permit payment in instalments. Interest under Section 220(2) still runs on the unpaid balance during any extended period.

How is a Section 245 refund adjustment reversed if the demand was wrong?

Respond to the Section 245 intimation on the portal disagreeing with the demand and giving reasons. If the adjustment has already happened and the demand is later deleted through rectification under Section 154 or appeal, the adjusted refund is released back to you with applicable interest under Section 244A.

The demand is because of a TDS mismatch. What do I select?

Choose "Disagree with the demand," add the reason relating to tax credit under Section 143(1) not being granted, and upload your Form 16 and Form 26AS. Do not pay; paying a mismatch demand converts a clerical error into a real outflow you then have to reclaim.

Can the 1% monthly interest ever be waived?

Yes. Section 220(2A) empowers the Principal Commissioner or Commissioner to reduce or waive interest where payment caused genuine hardship, the default was beyond your control, and you cooperated in the recovery. It is discretionary and applied for separately, not through the demand-response screen.

How do I add challan details for a demand I already paid?

Select "Demand is correct, already paid and Challan has CIN," click "Add Challan Details," and enter the minor head, challan amount, BSR code, serial number and date of payment, then upload the challan PDF (max 5 MB). CPC uses these to match your payment to the demand.

Does responding stop interest from accruing?

Only payment stops interest, not the mere act of responding. If you agree the demand is correct, interest under Section 220(2) keeps running until the tax is actually paid via e-Pay Tax. If you disagree and win, the demand and its interest are cancelled in full.