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F-14/15, Orbit Mall, Civil Lines, Jaipur-302006 support@thetaxheaven.comWaiting for an income tax refund can be frustrating, especially when the refund status suddenly shows that the amount has been adjusted against an outstanding tax demand. Many taxpayers discover this issue while checking their refund status or receiving an intimation from the Income Tax Department.
An income tax refund may be adjusted against an unpaid tax demand from an earlier assessment year. This process is commonly associated with Section 245 of the Income-tax Act, 1961. From 1 April 2026, the corresponding provision under the Income-tax Act, 2025 is Section 438. The Income Tax Department may use a refund to recover an amount that remains payable, but it must first send an intimation about the proposed adjustment.
The important point is that an outstanding demand shown on the portal is not always correct. It may relate to a genuine unpaid tax liability, a tax payment that was not properly recorded, a TDS credit mismatch, or an earlier return-processing error.
In this article, we explain why an income tax refund is adjusted against an outstanding demand in 2026, how to check the demand online, how to respond to an intimation, and what steps to take if the demand is incorrect.
When you file an income tax return, the department processes your return and determines whether you owe additional tax or are eligible for a refund.
Sometimes, the department's records show an outstanding tax demand from an earlier year. If a refund becomes due in a later year, the department may adjust some or all of that refund against the unpaid demand instead of transferring the entire refund to your bank account.
For example, suppose your current ITR shows a refund of ₹25,000. However, the Income Tax Department's records show an outstanding demand of ₹9,000 from an earlier assessment year.
If the demand is valid and the adjustment is completed, the department may use ₹9,000 from your refund to settle that demand. The remaining ₹16,000 may then be released, subject to any other applicable processing or refund conditions.
This is known as an income tax refund adjustment against an outstanding demand.
The adjustment does not necessarily mean that your current ITR contains an error. The demand may relate to an older return, an assessment, or a tax-credit issue from a previous year.
The applicable legal provision depends on the tax year and the law governing the demand and refund.
Section 245 of the Income-tax Act, 1961 allows the tax authorities to adjust a refund against an amount remaining payable by the taxpayer. Before making the adjustment, the department must send an intimation in writing about the proposed action.
This section is relevant to many demands and refunds relating to tax periods governed by the 1961 Act.
From 1 April 2026, the Income-tax Act, 2025 came into effect. Section 438 covers the set-off and withholding of refunds in certain cases.
The provision allows the department to set off a refund against an amount payable under the applicable law, subject to the statutory requirements. It also provides for prior intimation before the proposed adjustment.
The amended framework also addresses adjustments involving demands under the earlier Income-tax Act, 1961.
A taxpayer may receive a refund in 2026 while the outstanding demand relates to an earlier assessment year. The demand and refund may therefore be governed by different legal frameworks.
For this reason, taxpayers should not assume that every refund adjustment in 2026 is governed only by Section 245 or only by Section 438. Check the year involved and the wording of the intimation.
The Income Tax Department's portal may continue to use familiar labels such as a Section 245 notice for refund-adjustment communications. The section applicable to a particular case should be verified against the relevant tax year and notice.
There are several reasons why a refund may be adjusted against an outstanding demand. Understanding the original reason for the demand is essential before accepting or disputing the adjustment.
One of the most common reasons is an unpaid tax demand from an earlier assessment year.
For example, you may have filed an ITR several years ago, and the department's processing resulted in additional tax payable. If the demand was not paid or successfully disputed, it may continue to appear as outstanding.
When a refund becomes due in a later year, the department may propose to adjust it against that demand.
A mismatch in tax deducted at source can lead to an additional tax demand.
For example, your employer may have deducted ₹40,000 as TDS, but only ₹30,000 may have been credited during return processing. If the difference is not resolved, the processed return may show additional tax payable.
The issue may arise because of incorrect PAN details, a missing TDS statement, or a reporting error by the deductor.
Check Form 16, Form 16A, Form 26AS, and the relevant return-processing intimation before deciding how to respond.
Sometimes, a taxpayer pays self-assessment tax or advance tax, but the payment is not correctly reflected in the department's records.
Possible reasons include:
Incorrect assessment year selected while making payment.
Incorrect PAN entered in the challan.
Payment details not properly matched.
A challan that has not been considered during return processing.
A payment that was made but not correctly reported in the ITR.
If the demand has already been paid, collect the challan details and verify whether the payment was recorded against the correct PAN and assessment year.
The department may process an ITR differently from the taxpayer's calculation.
For example, a return may be processed with a reduced TDS credit, an adjustment to income, or a difference in tax calculation. This may create an outstanding demand even when the taxpayer believes the return was correct.
Review the intimation under Section 143(1) or the relevant assessment order to understand how the demand arose.
If the processing contains an apparent mistake, you may need to submit a rectification request or use another applicable remedy.
An outstanding demand may include interest or fees in addition to the original tax amount.
For example, interest may have been calculated because of a shortfall in advance tax or a delay in payment. A taxpayer who remembers only the original tax amount may therefore find that the demand shown online is higher.
Check the detailed computation rather than relying only on the total amount displayed on the portal.
A demand may also arise from an assessment or reassessment proceeding.
In such cases, the demand may be based on an order that changes the income or tax liability reported in the original return.
Read the relevant order and check whether the demand has been paid, challenged, stayed, or rectified. If an appeal or other proceeding is pending, keep the supporting documents ready when responding to the proposed refund adjustment.
You can check whether the Income Tax Department has recorded an outstanding demand against your PAN through the official e-Filing portal.
Follow these steps:
Step 1: Visit the Income Tax e-Filing portal
Open the official website:
Step 2: Log in to your account
Enter your PAN or other permitted user ID and password. Complete any additional authentication required by the portal.
Step 3: Open Pending Actions
After logging in, navigate to the Pending Actions menu.
Step 4: Select Response to Outstanding Demand
Click Response to Outstanding Demand. The portal will display the available demand details associated with your account.
Step 5: Review the outstanding demand
Check the details carefully, including:
Assessment year.
Demand amount.
Demand reference number, where available.
Current status.
Relevant response or payment options.
Any available notice or intimation.
Step 6: Open the demand details
Select the relevant demand to review the available information. Where provided, download the relevant notice, order, or earlier communication.
Step 7: Check the demand against your records
Compare the demand with your filed ITR, tax-payment challans, Form 26AS, TDS certificates, and any earlier rectification or appeal records.
Do not pay or accept a demand merely because it appears on the portal. First establish whether the amount is still payable.
If the department proposes to adjust your refund, you may receive an intimation explaining the proposed adjustment.
You can review the communication through the e-Filing portal.
Log in to the Income Tax portal.
Open the relevant pending action or e-Proceedings section.
Look for the intimation concerning adjustment against an outstanding demand.
Open the notice and read the details.
Download the notice for your records.
Note the assessment year, demand amount, and response deadline shown in the communication.
Check the available response options and submit your response through the prescribed portal facility.
The notice may be described as an intimation under Section 245. The portal also provides facilities for viewing certain earlier Section 245 notices.
Important: Do not assume that every taxpayer has the same response period. Follow the deadline stated in your particular communication and the applicable legal requirements. Respond as early as possible so that you have time to resolve any incorrect demand before the adjustment is completed.
Your response should depend on whether the demand is correct, already paid, or incorrect.
If you verify that the demand is valid and unpaid, you can use the portal to agree with the demand and pay the amount where required.
The general process is:
Log in to the Income Tax portal.
Go to Pending Actions > Response to Outstanding Demand.
Select the relevant demand.
Click the response option.
Choose the option indicating that the demand is correct.
Follow the portal's instructions to make payment, if payment is still due.
Save the payment confirmation and transaction details.
Read the portal's confirmation carefully before submitting your response. The department's user manual warns that selecting the option confirming a demand is correct may prevent you from disputing it later through that same response process.
If you have any uncertainty about the demand, review the underlying records before confirming it.
If you have already paid the demand, do not pay it again without checking the records.
First, locate the payment challan and verify the following details:
PAN.
Assessment year.
Challan amount.
Date of payment.
BSR code.
Challan serial number.
Relevant minor head or type of payment.
Then follow the portal's response process for a demand that has already been paid.
Depending on the available options, you may need to select the correct payment status and provide challan details. Upload the payment evidence if the portal requests it.
After submitting your response, save the acknowledgement or transaction ID and monitor the demand status.
If the demand is incorrect, you can submit a disagreement response through the portal.
Common reasons for disagreement may include:
The demand has already been paid.
The demand has been reduced or removed through a rectification order.
The demand is under appeal.
A stay has been granted.
TDS or tax-payment credit has not been allowed.
The demand relates to an incorrect PAN or other reporting issue.
The demand amount is incorrect for another reason.
The general steps are:
Log in to the e-Filing portal.
Open Pending Actions > Response to Outstanding Demand.
Select the relevant demand.
Choose Disagree with demand, either in full or in part.
Select the reason or reasons for disagreement.
Enter the requested details for each selected reason.
Upload supporting documents if required.
If you partially disagree, follow the portal's instructions for paying the undisputed portion.
Submit the response and save the acknowledgement.
Choose only the reasons that accurately describe your situation. A disagreement response should be supported by records wherever possible.
Submitting a disagreement does not automatically mean that the demand has been cancelled. The department may need to review the response or the underlying tax record.
If the demand is incorrect, the right remedy depends on why it was raised.
If the demand arose because of an apparent mistake in the processing of your return, a rectification request may be appropriate.
For example, the department may have failed to consider a tax credit that was correctly claimed and supported by the relevant records.
A rectification request is generally made through the e-Filing portal using the applicable rectification facility. Review the original processing intimation and select the appropriate rectification option.
Rectification is not a substitute for every type of dispute. If the issue requires a detailed examination of facts or challenges the underlying assessment, another legal remedy may be necessary.
If you have already filed an appeal against the order that created the demand, check the current appeal status and retain the filing acknowledgement.
If the demand is under appeal, select the relevant disagreement reason available on the portal and provide the requested details.
An appeal does not automatically mean that recovery is stayed. If you have a stay order, keep a copy ready and follow the applicable procedure.
If the demand arose because of missing TDS or tax-payment credit, compare the department's records with your own documents.
Useful records may include:
Form 16.
Form 16A.
Form 26AS.
Bank-issued tax certificates.
Advance tax challans.
Self-assessment tax challans.
Earlier rectification orders.
Relevant correspondence with the deductor or bank.
If the deductor reported TDS incorrectly, contact the deductor and request correction of the relevant TDS statement.
If a tax payment was made with incorrect details, check the applicable correction or challan-matching process.
If the portal does not reflect a payment, rectification order, or other relevant update despite your having completed the required steps, you may consider raising a grievance through the official portal.
Include the demand reference, assessment year, relevant acknowledgement numbers, and a concise explanation of the issue.
A grievance is useful for seeking assistance with a processing or portal-related problem. It should not be treated as a replacement for a formal appeal or other statutory remedy where one is required.
Ignoring an intimation about a proposed refund adjustment can have financial consequences.
The Income Tax Department's outstanding-demand guidance explains that if a taxpayer does not respond, the demand may be confirmed and adjusted against a refund, or remain payable against the taxpayer's PAN if no refund is due.
For example, suppose you are eligible for a refund of ₹18,000 and the portal shows an old demand of ₹7,000. If you do not respond and the demand is confirmed, the department may adjust the refund against that amount, subject to the applicable process.
If the demand is incorrect, failing to respond can make it more difficult to resolve the issue before the refund is adjusted.
Therefore, check the notice promptly, verify the demand, and submit the appropriate response within the stated deadline.
If you have resolved the outstanding demand, the refund may still require further processing.
The next steps depend on how the demand was resolved and the status of your refund.
Log in to the portal and open the outstanding-demand section. Check whether the demand has been updated following your payment, disagreement response, rectification, or other action.
If the demand continues to appear incorrectly, review the latest status and consider the appropriate follow-up.
Open the filed returns section and review the status of the relevant ITR.
Check whether the return has been processed and whether the department has determined a refund amount.
If the return has not been processed, the refund may not yet be ready for release.
Refunds are generally credited to a validated bank account associated with the taxpayer's e-Filing account.
Check whether your bank account is validated and nominated for receiving refunds, where required. Also verify that the account details are correct and that there are no bank-related restrictions preventing credit.
Use the refund-status facility available through the Income Tax portal or the relevant refund tracking service.
Check whether the refund is pending, issued, failed, or adjusted against a demand.
If the refund has failed because of incorrect bank details or another banking issue, follow the applicable refund reissue process.
If the demand has been resolved but the refund remains pending beyond the expected processing period, review the portal for any new communication or pending action.
You may raise a grievance or contact the department through its official support channels if the portal does not explain the delay.
Keep your ITR acknowledgement, processing intimation, demand response acknowledgement, payment evidence, and relevant bank details available when seeking assistance.
Consider the following illustrative example.
| Particulars | Amount |
|---|---|
| Refund determined for the current year | ₹30,000 |
| Outstanding demand from an earlier year | ₹12,000 |
| Refund potentially adjusted | ₹12,000 |
| Balance refund after adjustment | ₹18,000 |
In this example, the taxpayer has a refund of ₹30,000 and an outstanding demand of ₹12,000.
If the demand is valid and the adjustment is completed, ₹12,000 may be set off against the demand. The remaining ₹18,000 may be released, subject to the department's processing and other applicable requirements.
If the taxpayer disputes the demand and the department accepts the disagreement or corrects the demand, the refund outcome may change.
This example is only for explanation. Actual adjustments depend on the demand record, the refund determined, and the applicable legal process.
Before responding to a refund-adjustment intimation, collect the documents relevant to the demand.
| Document | Why it may be useful |
|---|---|
| Original ITR and acknowledgement | To verify income, tax liability, and credits claimed |
| Intimation under Section 143(1) or relevant order | To understand how the demand was created |
| Section 245 intimation or other adjustment communication | To check the proposed adjustment and response deadline |
| Form 26AS and TDS certificates | To verify tax credits |
| Tax-payment challans | To establish that a demand has already been paid |
| Rectification acknowledgement or order | To show that a correction was requested or completed |
| Appeal acknowledgement or stay order | To support a response where an appeal or stay is relevant |
| Bank statements or supporting records | To verify payments and other disputed facts |
| Previous demand-response acknowledgements | To track earlier submissions and department decisions |
Keep digital copies of submitted responses and acknowledgements. They can be useful if you need to follow up with the department or explain the matter in a later proceeding.
Your refund may be adjusted because the Income Tax Department's records show an outstanding tax demand from an earlier assessment year. The demand may relate to unpaid tax, a TDS mismatch, an unrecorded tax payment, or an earlier return-processing or assessment issue.
Check the demand details before accepting the adjustment.
Section 245 of the Income-tax Act, 1961 provides for adjustment of a refund against an amount remaining payable by a taxpayer, after prior intimation of the proposed action.
From 1 April 2026, Section 438 of the Income-tax Act, 2025 is the corresponding provision for the new Act. The applicable provision depends on the tax year and the relevant demand or refund.
Section 438 deals with set-off and withholding of refunds in certain cases. It allows the department to adjust a refund against an amount payable under the applicable law, subject to the statutory conditions, including prior intimation of the proposed action.
The applicable refund set-off provision requires prior intimation of the proposed adjustment. If you believe your refund was adjusted without the required communication, check the portal for the notice and relevant records, then seek clarification through the appropriate channel.
Log in to the official Income Tax e-Filing portal and navigate to Pending Actions > Response to Outstanding Demand. Review the assessment year, demand amount, and available notices or response options.
Review the original return-processing intimation or assessment order to identify the reason for the demand. Depending on the issue, you may submit a disagreement response, request rectification, provide payment evidence, or use the applicable appeal or grievance process.
The final refund outcome depends on the department's review, the validity of the demand, and the applicable process. Submitting a disagreement response does not automatically cancel the demand or guarantee immediate release of the full refund.
Keep supporting documents ready and monitor the response status.
If you have already paid the demand, locate the challan and verify the PAN, assessment year, amount, and payment details. Use the portal's response process for a demand that has already been paid and provide the requested challan information or evidence.
Once the demand is corrected or removed, the refund may still need to complete the applicable processing steps. Check your ITR processing status, bank-account validation, and refund status. If the refund remains pending, follow up through the official portal.
The response deadline should be checked in the specific intimation and on the e-Filing portal. Do not rely on a general number of days without checking the communication applicable to your case. Submit your response promptly.
Yes, a demand may continue to appear if the payment has not been correctly matched or updated in the department's records. Verify the challan details and submit the required response or correction request. Keep the payment acknowledgement for reference.
You may raise a grievance where the issue involves a portal, processing, or record-update problem. However, a grievance does not replace a statutory rectification, appeal, or other formal remedy when one is required. Choose the process that matches the reason for the dispute.
An income tax refund adjusted against an outstanding demand does not automatically mean that your current ITR is incorrect. The adjustment may relate to an older tax liability, a missing tax credit, an unpaid demand, or an error in the department's records.
The first step is to check the outstanding demand through the Income Tax e-Filing portal and review the original order or intimation that created it. If the demand is correct, follow the payment or agreement process. If it has already been paid or is incorrect, submit the appropriate response with supporting documents and use rectification or another applicable remedy where necessary.
In 2026, it is also important to distinguish between Section 245 of the Income-tax Act, 1961 and Section 438 of the Income-tax Act, 2025. The relevant provision depends on the tax year and the matter involved.
By reviewing the notice promptly, responding within the stated deadline, and keeping proper records, taxpayers can better manage refund adjustments and avoid unnecessary delays in resolving outstanding demands.
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