Section 245 Income Tax Notice: Refund Adjusted Against Demand | What to Do

You filed your return expecting a refund. You waited the usual few weeks. Then, instead of a credit in your bank account, an email arrived about a Section 245 notice.

That notice is the Income Tax Department telling you something specific: there is an outstanding demand against your PAN from a previous assessment year, and before releasing your current refund, they intend to adjust it against that older debt. Your refund is not gone yet. But unless you respond within the time given, the department will proceed with the adjustment automatically.

Here is what makes this notice different from most others: the underlying issue may have nothing to do with your current year's return. The demand being offset could be from three or five years ago, perhaps an old TDS mismatch, a processing error from a prior year's ITR, or a penalty you were not even aware existed. Many taxpayers receive a Section 245 notice for demands they genuinely believed were already settled.

This is why your first task is not to accept the adjustment. It is to verify whether the demand being offset is legitimate.

What Section 245 Actually Does

Section 245 of the Income Tax Act gives the Assessing Officer the statutory power to adjust a refund due to a taxpayer against any outstanding tax demand on their PAN before releasing that refund.

The keyword is "before." The law requires the department to send you prior intimation and give you a chance to respond before any adjustment is made. An adjustment done without notice is not legally valid.

Following the Finance Act 2023, the scope of Section 245 was widened. Refunds can now be withheld and adjusted not just when they arise from a summary assessment under Section 143(1), but also when they become due through TDS reconciliation, appeal effect orders, or other processing outcomes. This means taxpayers who receive refunds in any scenario may now encounter a Section 245 adjustment proposal.

The adjustment can be partial or complete. If your refund is Rs 25,000 and the outstanding demand is Rs 18,000, the department adjusts Rs 18,000 and releases the balance Rs 7,000 to your bank account. If the demand exceeds the refund, your entire refund is withheld and the remaining demand balance stays outstanding.

Why You Might Have an Outstanding Demand You Didn't Know About

This is the most common source of confusion when taxpayers receive a Section 245 notice. Many people are genuinely surprised because they believe all their prior year matters are closed.

Here are the situations that create old outstanding demands that surface through Section 245:

TDS mismatch from a prior year: Your employer's TDS return for an old year had an error. CPC processed your return based on what was in Form 26AS at the time and raised a demand. You never received the intimation because your registered email was outdated, or the notice went unnoticed. The demand sat on the portal unresolved.

Processing error in an old intimation under 143(1): CPC made an arithmetic error or failed to credit a deduction. A demand was generated. You were not aware of it at the time and did not file a rectification.

Penalty order for a prior year: An AO issued a penalty order under Section 270A or 271(1)(b) for an old year. The penalty remained unpaid. It now appears as an outstanding demand being offset against your current refund.

Demand from a completed assessment you thought was closed: The assessment was completed with additions, and you assumed the demand would be withdrawn when you filed the appeal. It was not. The demand remains live until the appeal is decided, and the appeal effect is given by the AO.

Demands from years where an amended or belated TDS correction was filed: Your employer or bank filed a corrected TDS return for an older year. This created a mismatch in that year's processed return, and CPC generated a revised demand that you were unaware of.

The practical advice is to check your outstanding demand status on the portal regularly, even for years you believe are fully settled. Log in, go to Pending Actions → Response to Outstanding Demand, and review all years. Any unaddressed demand across any assessment year shows up there and will eventually affect your refunds.

Your Options After Receiving a Section 245 Notice

The notice will specify the refund amount due, the outstanding demand being proposed for adjustment (with the assessment year and demand reference), and the deadline for your response. Read every line. Identify which year and which order the demand relates to.

You have three possible responses.

Response 1: Agree With the Adjustment

If you review the demand and conclude it is valid and unpaid, you can agree to the adjustment on the portal.

Log in to incometax.gov.in. Go to Pending Actions → Response to Outstanding Demand → Submit Response → Agree. Confirm your response. The department will then proceed with the adjustment and credit the balance refund, if any, to your bank account. Keep the transaction ID.

Response 2: Disagree With the Adjustment

If the demand being offset is incorrect, already paid, disputed, or stayed by a court or appellate order, select Disagree with demand (in full or in part) and provide the specific reason.

The portal gives you a dropdown of standard reasons. The most relevant ones for a Section 245 dispute are:

Demand already paid: You paid this demand earlier. Provide the challan details including BSR code, date, serial number, and amount. Upload the challan copy as a PDF.

Demand reduced by rectification or revision: A rectification order was passed, and the demand was reduced. Provide the order reference and updated demand amount.

Appeal filed and stay granted: You have a pending appeal, and the demand has been stayed. Upload the stay order from CIT(A) or ITAT as supporting evidence.

Demand is incorrect: There is an error in the demand itself. Attach your working and supporting documents demonstrating the error.

Demand already taken into account in a later order: Sometimes a demand gets resolved through a subsequent order, but the system still shows it as outstanding. Provide the reference to the later order.

After selecting the reason and uploading supporting documents, submit and note the transaction ID.

Response 3: Partially Agree

If part of the demand is valid and part is wrong, select the partial agreement option. Specify the amount you agree with and submit reasons and documents for the portion you are disputing. Pay the agreed portion through Challan 280 (Minor Head 400) and dispute the balance.

What Happens if You Do Not Respond Within 30 Days

The 30-day deadline is stated in the notice. If you do not respond within that period, the department proceeds with the adjustment automatically. Your refund is offset against the outstanding demand, and you lose the ability to dispute the adjustment before it happens.

Reversing an adjustment that has already been made is significantly more difficult than preventing it. You would need to: get the underlying demand corrected or cancelled through rectification under Section 154 or an appeal under Section 246A, then request the AO to release the adjusted amount.

That process can take months, sometimes longer. Responding before the deadline, even if only to flag a dispute, is always the better path.

One important note: if you received the Section 245 notice but genuinely missed the deadline due to circumstances beyond your control, you can still submit a response on the portal. The system may still accept a late response in some cases, particularly if the adjustment has not yet been processed. Contact the AO through the portal's grievance mechanism if you face difficulty submitting a late response.

If the Underlying Demand Is Wrong: The Path to Getting Your Refund Back

Many Section 245 adjustments involve demands that are incorrect. The good news is that incorrect demands can be challenged. The bad news is that once the adjustment has happened, the reversal process requires separate action.

If the demand is a clear processing error visible from your filed return and Form 26AS, file a rectification under Section 154. If the rectification succeeds and the demand is cancelled, submit the rectification order to the AO with a request to release the adjusted refund.

If the demand arose from a scrutiny or reassessment order that you believe is wrong, file an appeal under Section 246A before the CIT(A) within 30 days of the demand notice. If the appeal succeeds and the additions are deleted, you become entitled to a refund of the excess tax with interest under Section 244A.

The interest under Section 244A compensates you for the time the money was held by the department. It currently accrues at 6% per annum (0.5% per month). This interest is taxable in the year of receipt.

People Also Ask: Section 245 Income Tax Refund Adjustment

Can the Income Tax Department adjust my refund without telling me? No. Section 245 requires prior intimation to the taxpayer before any refund adjustment is made. The department cannot offset your refund against an outstanding demand without first sending you the intimation and giving you an opportunity to respond.

What is the time limit to respond to a Section 245 notice? Typically, 30 days from the date of issue of the notice. The exact deadline is stated in the notice itself. If you do not respond within this period, the department proceeds with the adjustment automatically.

What happens if the refund amount is more than the demand being adjusted? The demand is offset first, and the balance refund is credited to your registered bank account. For example, if your refund is Rs 40,000 and the outstanding demand is Rs 15,000, the department adjusts Rs 15,000 and credits Rs 25,000 to your account.

What if I disagree with the demand, but the adjustment has already happened? File a rectification under Section 154 if the demand is a processing error, or an appeal under Section 246A if it arose from an assessment order. If the demand is cancelled or reduced on rectification or appeal, the excess amount adjusted will be refunded to you with interest under Section 244A.

Can a demand that is stayed by CIT(A) be adjusted against my refund? Technically, a stayed demand is not a valid outstanding demand for the purposes of Section 245 adjustment. If your demand has been stayed by a court or appellate order, respond to the Section 245 notice with the stay order as supporting documentation under the "Disagree" option. Do not let the adjustment proceed on a stayed demand.

Does Section 245 apply to TDS refunds and advance tax refunds, or only self-assessment refunds? It applies to all types of refunds, including TDS refunds, advance tax refunds, and self-assessment tax refunds. Any refund due on your PAN for any assessment year can be subject to adjustment under Section 245.

Real Questions People Ask When They Get This Notice

"I was expecting my AY 2025-26 refund and received a Section 245 notice mentioning a demand from AY 2019-20. I had no idea about any old demand. What do I do?" Log in to the portal immediately and go to Pending Actions → Response to Outstanding Demand. Find the demand for AY 2019-20 and open the order that generated it. Understand what it relates to: was it a 143(1) processing demand, a scrutiny order, or a penalty? Once you know the source, check whether you paid it at the time (search your bank records for Challan 280 payments for that year). If it was paid, dispute the Section 245 adjustment with the challan details. If it was a genuine error by CPC, file a rectification. If it was a legitimate demand you missed, you can agree to the adjustment and move on.

"The demand being adjusted is from six years ago, and I definitely paid it. How do I prove this now?" Old challan payments can be verified in a few ways. Check your net banking history for tax payments in that year. Log in to the OLTAS (Online Tax Accounting System) portal at tin.tin.nsdl.com and look up challan status using your PAN and the year of payment. Retrieve the BSR code, challan serial number, and date, then submit these in your dispute response on the portal. Alternatively, your bank can provide a certified copy of the challan from their records.

"Part of the demand looks correct, but part seems wrong. Can I agree to one part and dispute the other?" Yes. Select the partial disagreement option on the portal. Specify the amount you agree with, pay that portion via Challan 280, and submit your reasons and supporting documents for the portion you are disputing. This approach is entirely valid and shows the department you are engaging honestly with the notice.

"I ignored the notice because I thought it was spam, and now my refund has been adjusted. What can I do?" Start by identifying whether the demand that was offset is correct or incorrect. If it was incorrect, file a rectification under Section 154 for the underlying error. If the rectification is successful and the demand is cancelled, approach the AO with the rectification order and request release of the adjusted refund amount. If the demand was correct but you simply were not aware of it, the adjustment was technically valid, and reversal would require separate proceedings. File a condonation of delay application if you believe you had valid grounds for missing the original demand notice.

"My demand was stayed by CIT(A) during my appeal, but the Section 245 notice is still proposing to adjust my refund against it. Can I stop this?" Yes. Respond to the Section 245 notice on the portal within the deadline, select Disagree, choose "Stay granted by appellate authority" as the reason, and upload your stay order as the supporting document. A stayed demand is not a recoverable outstanding demand and should not be used for refund adjustment. If the adjustment proceeds despite this response, raise a grievance on the portal and follow up with the AO directly.

Received a Section 245 notice and unsure whether the demand being offset is correct? Upload your notice to our AI tool. It identifies the underlying assessment year and demand source, checks whether the demand is likely valid or disputable, and walks you through the response in plain language before your deadline passes.