Refund Adjustment Against Outstanding Demand: How Section 245 Works in AY 2026-27
TL;DR
- Section 245 of the Income Tax Act, 1961 allows the department to adjust a current-year refund against any prior assessment year's outstanding demand.
- Before any adjustment, the CPC must send you an intimation under Section 245 giving 30 days to respond — agree, disagree, or pay.
- If you do nothing, the refund is adjusted automatically and the balance (if any) is released to your validated bank account.
- For AY 2026-27, intimations under Section 245 land in your e-filing portal under Pending Actions > Response to Outstanding Demand.
- A wrong demand can be challenged — file Section 154 rectification, raise a grievance on the portal, or contest the underlying assessment.
What this means in plain terms
You filed your return for AY 2026-27, the system computed a refund of Rs. 47,000, and you waited for the credit. Two weeks later, instead of a bank deposit, you got an email saying your refund has been adjusted against a Rs. 39,000 demand from AY 2022-23 that you barely remember. The remaining Rs. 8,000 was credited, but the bulk vanished into a demand you never noticed.
This is not a glitch. It is Section 245 of the Income Tax Act doing exactly what the law says it can do — set off any current refund against an earlier unpaid demand. The catch is that the department must follow due process, which means a prior intimation under Section 245 and a 30-day window for you to push back. If you ignore that window, the adjustment becomes final. This guide walks through how the mechanism works and what you can still do.
When Section 245 kicks in
Prior demand on record
The trigger is simple — any demand pending against your PAN, regardless of which assessment year it relates to, can be set off against a fresh refund. The demand might come from a Section 143(1) intimation, a Section 143(3) scrutiny order, a Section 147 reassessment, or a TDS demand from the TRACES system that linked back to your PAN.
Refund computed for the current year
The set-off only happens when there is a refund to adjust. If your current-year return shows zero refund or a tax payable, Section 245 does not apply — the department uses other recovery routes for the older demand instead.
Prior intimation is mandatory
The Supreme Court in Hindustan Unilever v. UOI and several High Court rulings have repeatedly held that Section 245 requires a prior intimation in writing. CBDT instructions to CPC also reinforce this — no adjustment without first telling the taxpayer.
What the Section 245 intimation looks like
Where it appears
For AY 2026-27, the Section 245 intimation appears in two places on incometax.gov.in — under Pending Actions > Response to Outstanding Demand, and as an email to your registered ID. The intimation lists the assessment year, the demand amount, the order under which it was raised, and the refund amount proposed to be adjusted.
The 30-day window
You get 30 days from the date of intimation to respond. Three options exist — agree with the demand (refund gets adjusted), disagree (you submit reasons and supporting documents), or pay the demand separately to release the refund in full.
Auto-adjustment if you stay silent
If 30 days pass without a response, the system treats it as deemed acceptance and processes the adjustment. The refund (net of demand) is then credited to your pre-validated bank account.
How to respond if the demand is wrong
Verify the demand on the portal
Log into incometax.gov.in, go to Pending Actions > Response to Outstanding Demand, and click the relevant assessment year. The screen shows the original demand notice, the date it was raised, and any partial payments. Download the underlying order to understand what the demand is for.
File a Section 154 rectification
If the demand is wrong because of a clerical mistake — TDS not credited, double counting of income, arithmetic error — file a rectification request under Section 154 for that assessment year. Once accepted, the demand is reversed and the refund is released.
Raise a CPC grievance
For demands stuck due to data mismatches between TRACES and CPC, raise a grievance on the e-filing portal under Grievances > Submit Grievance > CPC-ITR. Attach Form 26AS, the relevant TDS certificates, and a clear narrative of what you believe is wrong.
Use the Disagree option
On the Section 245 response screen itself, select "Demand is incorrect" and choose a sub-reason — TDS already credited, demand already paid, rectification pending, appeal pending. Upload supporting documents. The CPC reviews and either holds the adjustment or processes it with reasons.
Special situations
Demand pending in appeal
If you have already filed an appeal before the Commissioner (Appeals) and the demand is stayed, mention this in the response and attach the stay order. Section 245 cannot override a valid stay.
Demand under instalments
Where you have an instalment arrangement with the assessing officer, mention the order granting instalments. Refunds should not be adjusted in violation of an agreed payment schedule.
Demand of a deceased taxpayer
If the demand relates to a deceased taxpayer and the refund is being claimed by a legal heir, both the demand and the refund must legally pass through the legal-heir registration process before any adjustment.
A real example
Vikram, 41, Rs. 32L CTC, Hyderabad. Vikram filed his ITR-1 for AY 2026-27 in June 2026 and the system computed a refund of Rs. 52,000 — mainly from excess TDS on his salary and FD interest. Two weeks later, instead of a credit, he got a Section 245 intimation saying a Rs. 36,500 demand from AY 2020-21 would be adjusted, leaving him Rs. 15,500.
Here is what he did:
- Logged into incometax.gov.in and went to Pending Actions > Response to Outstanding Demand.
- Saw the AY 2020-21 demand was raised in 2022 under Section 143(1) for "TDS mismatch."
- Pulled out his AY 2020-21 records and saw the Rs. 36,500 was a TDS credit the deductor had filed late — it now showed up in his Form 26AS.
- Filed a Section 154 rectification request for AY 2020-21 attaching the updated Form 26AS.
- On the Section 245 response, selected "Demand is incorrect — rectification pending" and uploaded the rectification acknowledgement.
- Six weeks later, the Section 154 was processed, the demand was reversed, and the full Rs. 52,000 was credited to his bank.
The lesson — Section 245 is not the end of the road. A wrong demand can be challenged, but only if you respond within 30 days and supply the right documents.
What to do this week
- Log into incometax.gov.in and check Pending Actions > Response to Outstanding Demand for any open Section 245 intimations or older demand entries.
- For each demand listed, download the underlying order and verify whether it is correct based on your Form 26AS, AIS, and TDS certificates.
- If a demand is wrong due to a clerical error, file a Section 154 rectification request immediately and keep the acknowledgement.
- Pre-validate at least one bank account so that any net refund (after legitimate adjustments) can be credited without further delay.
- Run the 6-step assessment at https://myfinancial.in to see your old-vs-new regime delta, unused deductions, and insurance gap in under 10 minutes.
FAQ
Can the department adjust my refund without telling me?
No. Section 245 mandates a prior intimation in writing and a reasonable opportunity to respond. Any adjustment without prior intimation can be challenged as procedurally invalid.
What is the time limit to respond to a Section 245 intimation?
The intimation gives 30 days from the date of issue. If you do nothing within this window, the system treats it as agreement and processes the adjustment.
Can I get the adjusted refund back if the demand is later cancelled?
Yes. If the underlying demand is reversed via Section 154 rectification, appeal, or revision, the amount adjusted is refunded with interest under Section 244A.
Does Section 245 apply if the demand is barred by limitation?
Demands that are time-barred for recovery cannot generally be enforced, but you must raise this as a ground in your response. The CPC does not check limitation automatically.
Is the adjusted amount counted as refund issued for the year?
Yes, for accounting purposes the gross refund is shown as issued and the demand as paid. You will see both entries on your refund status page on incometax.gov.in.
Can I split the adjustment — pay some and adjust some?
You can pay any portion of the demand separately using Challan 280. Once the payment reflects, the residual demand reduces and only that smaller amount is adjusted from your refund.
Where do I check the original demand order?
Log into incometax.gov.in, go to Pending Actions > Response to Outstanding Demand, click the assessment year, and download the order. You can also find it under e-Proceedings.
Sources
- https://incometax.gov.in
- https://www.incometax.gov.in/iec/foportal/help/all-topics/respond-to-outstanding-demand
- https://www.tin-nsdl.com
- https://incometaxindia.gov.in/Pages/acts/income-tax-act.aspx
- https://www.cbdt.gov.in
This is general information, not personalised advice. For your situation, consult a Certified Financial Planner.
