Section 245 Refund Adjustment: Why CPC Sets Off Refund Against Outstanding Demand With Notice

You filed your return on time, the portal flashed "refund determined", and then weeks later an intimation lands saying your refund has been set off against a tax demand from four years ago that you barely remember. This is Section 245 of the Income Tax Act, 1961 in action, and in the 2025 filing season the Centralised Processing Centre (CPC) at Bengaluru has been issuing these adjustment notices at scale. Knowing the 30-day clock attached to that notice is the difference between recovering your full refund and watching it vanish against a demand you may not even owe.

The Scenario

Picture Ananya, a salaried product manager in Pune. For Assessment Year (AY) 2025-26 her employer deducted Rs 1,30,000 as TDS, but her actual liability under the new regime works out lower, leaving a refund of Rs 48,100. On 12 May 2026 the e-filing portal shows the refund as "determined". Then on 28 May 2026 she receives an intimation under Section 245 proposing to adjust that refund against an outstanding demand of Rs 35,000 raised for AY 2021-22 — a demand she disputes, because it arose from a TDS mismatch that was never her fault.

This is one of the most common "what if" situations Indian taxpayers face after filing. The demand is often stale, sometimes already paid, and occasionally the result of a deductor failing to deposit TDS. The Income Tax Department's own grievance data, published on incometax.gov.in, shows refund-adjustment complaints are a recurring category. The good news: Section 245 does not let the Assessing Officer or CPC seize your refund silently. There is a mandatory procedure, and a 30-day window that exists precisely so Ananya can object.

Statutory Answer

Section 245 of the Income Tax Act, 1961 empowers the tax authority to set off the amount of a refund due to an assessee against any sum "remaining payable" by that assessee under the Act. The bare provision is published at indiacode.nic.in as part of the consolidated statute. In plain terms, if you are owed a refund for one year but carry an outstanding demand for another, the Department may use the first to clear the second.

Critically, the section attaches a procedural condition: the authority must give the assessee "an intimation in writing of the action proposed to be taken". The Finance Act 2023 sharpened this further by providing a 30-day window — the assessee must be allowed 30 days from service of the intimation to respond before any set-off is completed. This is not a courtesy; it is a statutory safeguard. Where the 30 days are not granted, the adjustment is procedurally defective.

The courts have reinforced this. In Hindustan Unilever Ltd v. Deputy Commissioner of Income Tax, the Bombay High Court held that an adjustment under Section 245 made without first serving the prior intimation and considering the assessee's reply was invalid. The judgement is reported on indiankanoon.org, and it is the reason the CPC now routinely issues the intimation before acting. The Central Board of Direct Taxes (CBDT) has separately, through administrative instructions, directed that demands which are disputed and under stay should not be adjusted mechanically.

The table below sets out what each party must do, and by when.

Worked Resolution

Return to Ananya. First, it helps to see how her refund of Rs 48,100 arose, because the refund must exist before any Section 245 set-off can touch it. Her salary for FY 2025-26 is Rs 14,00,000, and under the new regime she claims the standard deduction of Rs 75,000, leaving taxable income of Rs 13,25,000. You can reproduce this on the Oquilia income-tax calculator or the new-regime calculator.

Because her income exceeds Rs 12,00,000, the Section 87A rebate does not apply — the new-regime rebate of up to Rs 60,000 is available only where total income is at or below Rs 12,00,000 for FY 2025-26. Her refund therefore stands at Rs 48,100, confirmed by checking the TDS calculator against her Form 16.

Now the Section 245 intimation arrives on 28 May 2026 proposing to adjust the Rs 48,100 against a Rs 35,000 demand for AY 2021-22. Ananya has 30 days — until 27 June 2026 — to act. Her three realistic outcomes are:

• She ignores it. After 27 June 2026 the CPC proceeds with the adjustment. Rs 35,000 is set off, and only the residual Rs 13,100 is released. She has lost the disputed amount for now.
• She agrees the demand is correct. She can simply accept on the portal, the Rs 35,000 is adjusted, and the balance Rs 13,100 is refunded faster.
• She disputes the demand. She logs in to the e-filing portal, opens the "Pending Actions" then "Response to Outstanding Demand" tab, and selects "Disagree with demand", attaching evidence — say, the Form 26AS proving the TDS was deposited. If the demand is found to be incorrect or is placed under stay, the full Rs 48,100 is released.

The practical lesson is that the refund is not gone until the 30 days lapse without a response. The window is the leverage.

To protect yourself before any intimation ever arrives, three habits help. Check the "Pending Actions" tab on the e-filing portal at least once a quarter, because old demands can sit dormant for years before a fresh refund triggers a set-off. Reconcile your Form 26AS and Annual Information Statement (AIS) every year so a deductor's failure to deposit TDS never becomes your demand. And respond to every demand notice the moment it appears, rather than waiting for it to collide with a future refund. For the mechanics of how an initial processing intimation differs from a demand, our explainer on the Section 143(1) intimation walks through the 30-day response flow, and if you need to correct an already-filed return, the Section 139(8A) updated-return guide covers the ITR-U route.

FAQ

What exactly is a Section 245 intimation and is it the same as a tax notice?

A Section 245 intimation is a written notice issued before the Department sets off your refund against an outstanding demand. It is not a penalty notice or a scrutiny notice; it is a procedural step under the Income Tax Act, 1961 that gives you 30 days to respond. You can track your refund status using the concept explained in our tax refund glossary entry.

Can the CPC adjust my refund without telling me first?

No. The section requires an intimation in writing of the proposed action, and the Finance Act 2023 confirms a 30-day response window. The Bombay High Court in Hindustan Unilever Ltd v. DCIT struck down an adjustment made without that prior intimation. If a set-off happens without notice, you have grounds to file a grievance on the e-filing portal citing the procedural breach.

What happens if I miss the 30-day deadline?

If you do not respond within 30 days of the intimation being served, the Assessing Officer or CPC may proceed with the adjustment. The disputed demand is set off, and only the balance refund is released. You can still contest the underlying demand afterwards through rectification under Section 154 or an appeal, but recovering the adjusted amount becomes slower and harder.

The demand is from an old assessment year I thought was closed — do I still have to respond?

Yes. A demand can remain on the system for years if it was never formally deleted, even after the assessment year in question is long past. If you believe it was already paid or is incorrect, select "Disagree with demand" on the portal and attach proof such as a challan or Form 26AS entry. Silence is treated as acceptance once the 30 days lapse.

Will I get interest on the refund that gets adjusted?

Interest on refunds is governed by Section 244A, calculated at 0.5% per month. When a refund is adjusted under Section 245, the interest computation applies up to the date of adjustment. The exact interest depends on the period and the amount, so verify the figure in your intimation against your own calculation rather than assuming the portal is always right.

How do I check if I have any outstanding demand before filing?

Log in to the e-filing portal, open "Pending Actions" and then "Response to Outstanding Demand". This shows every demand on record across assessment years. Doing this before you file means you can clear or dispute a stale demand in advance, so it never ambushes a future refund. Cross-check any advance tax or self-assessment payments you have already made.

Can a disputed demand under stay still be adjusted?

The CBDT has instructed that demands which are genuinely disputed and under a valid stay should not be mechanically adjusted. If you have obtained a stay from the Assessing Officer or an appellate authority, record that status in your Section 245 response and attach the stay order. A bona fide disputed or stayed demand is a recognised ground to prevent the set-off.