Income Tax Section 245: Tax Refund Adjustments Explained

Section 245 allows the Income Tax Department to adjust your tax refund against any outstanding tax demand. Before making this adjustment, the department must send you an intimation in writing and give you a chance to respond.

Income Tax Act 2025 Update

• The Income Tax Act, 2025 have replaced the terms Previous Year & Assessment Year with the term Tax Year. For example, if the income was earned in the year 2025-26, it will be called Tax Year 2025-26. However, since many taxpayers are still familiar with the terms Financial Year (FY) and Assessment Year (AY), this guide continues to use them for easier understanding.
• The new Income Tax Act has renumbered most of the sections and simplified them by reducing the number of sections, schedules, etc.

Section 245 allows the Income Tax Department to adjust your tax refund against any outstanding tax demand. Before making this adjustment, the department must send you an intimation in writing and give you a chance to respond.

Intimation u/s 245 is a type of notice/intimation issued by the Income Tax Department to inform you that they are adjusting your previous year’s pending tax payable with the current year’s refund.

Section 245 of the Income Tax Act gives the Income Tax Department power to adjust any previous year’s demand of tax payable with the current year’s refund. But to exercise this power, it’s mandatory on their part to send intimation under section 245 of the Income Tax Act to the taxpayers and allow them to submit their response on it whether they agree with it.

For example, the Income Tax Department had raised a demand for tax of Rs 21,000 from Mr. Sharma in the F.Y. 2012-13 after he filed his return. Mr. Sharma did not agree with the demand as the department did not consider his TDS. So, he simply filed for rectification u/s 154 and lived peacefully thereafter.

Then came F.Y. 2016-17; Mr. Sharma, like every year, filed his return, but this time with a refund of Rs 15,000. But instead of getting a refund, he got an intimation from the Income Tax Department u/s 245 stating that his refund of Rs 15,000 was being adjusted with the demand raised by the department in the F.Y. 2012-13. This gave Mr. Sharma the goosebumps of the F.Y. 2012-13 when he struggled with that dreaded demand of Rs 21,000 and, after consulting with professionals, filed a rectification u/s 154. Apparently, the Income Tax Department did not agree with the rectification u/s 154 at that time, and the demand still remained.

In this case, the Income Tax Department is authorized to send an intimation u/s 245 stating that the previous tax demand due will be adjusted against the current year’s refund payable. Therefore, Rs.21000 will be adjusted against the refund of Rs.15000.

How to Respond to the Income Tax Notice u/s 245?

Once you receive the Intimation under section 245 of the income tax act, read it in and out and check all the details along with the time mentioned within which you can take any action (generally, it’s 30 days) because if you do not take any action, then the outstanding demand as on that date will be considered for adjustment against your refund.

In other words, as soon as you receive an intimation u/s 245, you must respond to it within the time frame specified in the notice. If you fail to respond to it, the previous outstanding demand will be automatically adjusted against your current year’s refund. Now, let’s understand how you can respond to such a notice.

There are two possibilities, either you agree to the outstanding demand, or you do not.

If you agree with the Outstanding Demand:

• Step 1. If you agree with the outstanding demand, simply log onto www.incometax.gov.in with your user ID and password.
• Step 2. Go to Pending Actions tab – > Response to outstanding demand – > Submit response – > Demand is correct – > Submit.
  *At this time, you can also pay the outstanding tax amount directly from there.
• Step 3. After submitting, verify that your submission has been recorded successfully. Even if you do not act within the stipulated time, the demand will be automatically adjusted with your refund.

If you do not agree/partially disagree with the Outstanding Demand:

• Step 1. If you do not agree with the outstanding demand, simply log onto http://www.incometax.gov.in with your user ID and password.
• Step 2. Go to the ‘Pending Actions ‘ tab – > Response to outstanding demand – > Submit response – > Disagree with demand(Either in full or part) – > Submit.
• Step 3. In these cases, you’ll also have to submit the reasons for our partial/full disagreement with the demand, like Demand Paid, Demand already reduced by rectification/revision, Appeal has been filed, etc.
• Step 4. Now verify that your submission and your reasons have been recorded successfully. Also, make sure to keep a record of your response and follow up with the Income Tax Department.

Reason for Issuing Intimation u/s 245

The Income Tax Department issues an Intimation under Section 245 to adjust any outstanding demand from a previous assessment year against the current year’s refund. This adjustment occurs when the taxpayer has an unpaid tax liability from a prior year and a refund available in the current year. This process ensures the taxpayer settles their dues.

The department issues this intimation for reasons such as discrepancies in tax payments, unadjusted demands, or outstanding tax dues not addressed through regular assessment procedures. It helps reconcile past and current tax liabilities.

What is the Process for Checking/verifying Details of Outstanding Tax Demand?

Step 1:

Login into your income tax portal with your user ID and password.

Step 2:

Navigate to view returns/forms – once you have logged in, locate and select the view returns/forms tab present on the dashboard.

Step 3:

Select ‘Income Tax returns’ – Click on ‘income tax returns’ from the options available in order to access the details of your filed returns.

Step 4:

Choose the relevant assessment year – From the income tax returns section, select the relevant assessment year for which you want to check the details.

Step 5:

View e-filed returns/forms – Click on the acknowledgment number associated with the desired assessment year to view the filed returns/forms.

Step 6:

Check Outstanding Demand – Examine the information to identify any outstanding demand or tax payable for a particular year.

Step 7:

Review intimation under section 245 – If you have received an intimation under section 245, check the document for details regarding the outstanding demand and the proposed adjustment against the current year refund.