Section 245: Refund Adjustment Against Demand

A note on the law: section numbers here are from the Income tax Act, 1961, the operative law for the current filing cycle.

Section 245 lets the Assessing Officer adjust a refund due to you against any outstanding tax demand from a different assessment year, before releasing whatever is left of the refund. This is a genuinely common notice, and it is not an accusation of wrongdoing, it is simply the department netting one open account against another.

What triggers it

Any of these, sitting unpaid from an earlier year, can trigger an adjustment against a current refund:

• Unpaid advance tax or self-assessment tax from a prior year
• A TDS mismatch that resulted in a demand
• Interest or penalty demands left unresolved
• A demand raised after a scrutiny or reassessment order

It often surprises people to see an old demand resurface this way years later, since the demand itself did not disappear just because nothing happened on it in the meantime, it stays live on your PAN until it is paid, adjusted, or resolved.

The 30 day response window

The department must send you a written intimation before making the adjustment, it cannot simply net the two amounts silently. You then have 30 days from the date of that intimation to respond, through the e-filing portal under Pending Actions, Response to Outstanding Demand.

Three responses are available:

• Agree with the demand, in which case the adjustment proceeds as proposed
• Partially agree, confirming part of the demand while disputing the rest, with reasons for the disputed portion
• Disagree, selecting from listed reasons, demand already paid, rectification already filed, appeal already pending, and so on, and submitting supporting details for each reason selected

Missing the deadline has a real cost. If you do not respond within 30 days, the department proceeds with the adjustment automatically, and interest that has accrued on the principal demand for the pending period gets folded into the amount adjusted, without your confirmation.

If the underlying demand is actually wrong

Disagreeing within the 245 response itself is the first move, but the actual correction still runs through the normal channels: a rectification application under Section 154 (rectification of mistake) if the demand stems from an error apparent from the record, such as a TDS credit not properly considered, or an appeal under Section 246A if you are contesting the underlying assessment itself. The 245 response window is not where the demand gets legally corrected, it is where you flag that a correction is already in motion or should be, so the department does not adjust against a demand that may not hold up.

Checking your outstanding demands directly is worth doing even without a 245 notice in hand. Old demands, sometimes from years ago, sometimes raised in error, sit visible on the e-filing portal under your PAN. Clearing or contesting them proactively avoids a surprise adjustment against a future refund.