Refund Adjusted Against an Old Demand (Section 245): How to Challenge It

You expected a refund of ₹42,000 for AY 2026-27. Instead an email from CPC (the Centralised Processing Centre) says it proposes to adjust your refund against an outstanding demand for AY 2019-20, a year you thought was closed. If you do nothing, the refund goes to clear that demand and you see little or none of it.

This is a set-off under section 245 of the Income-tax Act, 1961. It is lawful when the old demand is real. It is worth challenging when the demand was already paid, has been reduced by a rectification or appeal, or is under appeal. The time to act is the window between the intimation and the adjustment, through Response to Outstanding Demand on the portal.

What section 245 allows

Section 245 was rewritten by the Finance Act, 2023, with effect from 1 April 2023, and is now titled "Set off and withholding of refunds in certain cases". It does two different things:

• Set-off (sub-section 1). Where a refund is due to you, the Assessing Officer or other income tax authority may set it off, in whole or in part, against any sum still payable by you under the Act. This can be done only after giving you an intimation in writing of the proposed action.
• Withholding (sub-section 2). Where assessment or reassessment proceedings are pending and the Assessing Officer thinks granting the refund is likely to hurt the revenue, the refund can be withheld until that assessment is made. The officer must record reasons in writing and get prior approval from the Principal Commissioner or Commissioner.

This post is about the first: a refund used to pay an older demand.

Which law applies

Refunds and demands for AY 2026-27 and earlier years are dealt with under the Income-tax Act, 1961, even when the intimation reaches you after 1 April 2026, because the Income-tax Act, 2025 saves proceedings for those years. The 2025 Act applies from Tax Year 2026-27, whose returns are filed in 2027. We have not been able to confirm the provision in the 2025 Act that corresponds to section 245, so this post doesn't name one. When a set-off intimation arrives for a new-Act year, it will cite the provision it relies on.

Step 1: check whether the old demand is real

Before you respond, find out what the demand is.

1. Log in at incometax.gov.in.
2. Go to Pending Actions > Response to Outstanding Demand. Each demand is listed with its assessment year, demand reference number, amount and interest, and the details show the section and date it was raised under.
3. Download the section 245 intimation itself with Latest section 245 notice (or Section 245 Notice issued earlier for older ones) on the same page, and the order or intimation behind the demand where the portal offers it.
4. Compare it with your records: challans you paid for that year, any rectification you filed, any appeal and its outcome.

You will usually land in one of these cases:

If the demand exists only because a payment wasn't matched, a demand after you've already paid covers the usual causes. If you cannot tell whether the demand is correct, a chartered accountant who can read the old order is worth the fee before you agree to anything.

Step 2: respond before the adjustment

Respond under Pending Actions > Response to Outstanding Demand. The intimation states how long you have; respond within that time. The portal's FAQ is plain about the cost of silence: if you don't respond, the demand is confirmed and adjusted against your refund. Our walkthrough of responding to an outstanding demand shows each screen.

Your options:

1. Demand is correct. Choose Demand is Correct. You can pay through Pay Now, or let the refund absorb it. The portal warns that you can't disagree with the demand after submitting this.
2. Demand was correct but you have already paid it. Choose Demand is Correct, then Yes, Already paid and Challan has CIN, and add the challan's minor head, amount, BSR code, serial number and date, with a PDF copy.
3. Demand is partly correct. Choose Disagree with demand (Either in Full or Part), give the amount you dispute and the reason, and pay the part you agree with. The FAQ asks you to pay the undisputed portion.
4. Demand is wrong in full. Choose Disagree with demand (Either in Full or Part) and select the reasons from the list. Give the supporting detail for each, such as the date and reference of the rectification or appeal order.
5. Reason not on the list. Select Others, explain in the text box and state the amount you say is not payable.

Keep a copy of the response. You can view a submitted response later with View against that demand.

A worked example

Rahul's AY 2026-27 return shows a refund of ₹42,000 (TDS ₹1,58,000 against tax of ₹1,16,000). CPC's intimation under section 245 proposes to adjust an AY 2019-20 demand of ₹27,500.

The figures leave out interest for simplicity. A real intimation also shows interest on the old demand, and your refund may carry interest of its own.

If the refund has already been adjusted

You can still recover money taken against a demand that wasn't payable. Which route fits depends on who raised the old demand.

• The demand was raised by CPC (for example in a 143(1) intimation for that year). File a rectification request for that year if the mistake is apparent from the record, such as a challan not credited. Our guide on rectification or revised return explains the request types.
• The demand was raised by the Assessing Officer (for example after a scrutiny assessment). Write to the jurisdictional Assessing Officer with the proof, or apply for rectification of that order. Find your officer through Know Your AO in the portal's Quick Links.
• Nobody acts. Raise a grievance through e-Nivaran: Grievances > Submit Grievance, department CPC-ITR with category REFUND for a CPC adjustment, or department AO with category Refund not received. Our e-Nivaran guide covers how to choose.

High Courts have repeatedly set aside adjustments made without the written intimation section 245 requires. If your refund was adjusted without any intimation, say so in the rectification, letter or grievance, and consider taking advice from a chartered accountant or lawyer.

Demands under appeal

If you have appealed the old demand, say so in your response and give the appeal details. CBDT guidance on stay of demand pending appeal has generally asked officers to collect a portion of a disputed demand, not all of it, but the share and the conditions depend on your case and the current instruction. Ask the Assessing Officer for a stay in writing and get professional advice if a large amount is involved.

If you track returns for family members, myutils.me lists each PAN's outstanding demands (with DIN, dates, interest and rectification rights) and refund status after you sync. It is an independent app, and you still respond to the demand on the portal yourself.

FAQ

Can CPC adjust my refund without telling me?

Section 245(1) allows the set-off only after an intimation in writing of the proposed action. Courts have treated an adjustment without that intimation as invalid. Check your registered email, including spam, and the portal's Pending Actions before concluding you weren't told.

How long do I have to respond to a section 245 intimation?

The intimation states the period. Respond within it through Response to Outstanding Demand. If you miss it, the demand is treated as confirmed and adjusted.

Will I get interest on the refund that was wrongly adjusted?

Refund interest is generally payable until the refund is granted, but how a later correction is treated depends on the facts. Look for an interest line in the order that releases the money, and ask a chartered accountant if it seems missing.

The demand is from 2012. Can it still be collected?

Old demands remain outstanding until paid, reduced or written off. Small, very old demands were remitted in 2024 following an Interim Budget announcement, so check the current amount on the portal before you respond.

Is a refund adjustment the same as a demand notice?

No. The set-off uses money the department already owes you. The old demand itself came from an earlier order or intimation, and that is what you challenge.

Sources

• Response to Outstanding Demand FAQs, e-Filing portal
• Response to Outstanding Demand user manual, e-Filing portal
• Submit Grievance (e-Nivaran) user manual, e-Filing portal
• Refund status user manual, e-Filing portal
• Section 245, Income-tax Act, 1961 (as substituted by the Finance Act, 2023), Income Tax Department