Refund Adjustment Under Income-tax Act 2025: Notice Triggers, Response Strategy and Penalties
By Finin2min Research DeskHigh PriorityUpdated June 2026ITR Season 2026
You filed your ITR, your Form 26AS confirms TDS, and you're expecting a refund of ₹45,000. Then the e-filing portal shows: "Your refund of ₹45,000 has been adjusted against outstanding demand of ₹38,000 for AY 2020-21. Net refund payable: ₹7,000." This scenario is playing out across thousands of taxpayer accounts in the ITR 2026 season. The Income-tax Act 2025 retains the refund adjustment power under Section 245A — but also retains your right to contest it. This guide walks you through the triggers, the 30-day window, and the step-by-step response strategy.
Use the Income Tax CalculatorModel the tax impact alongside this guide.
Section 245A of the Income-tax Act 2025 — The New Provision
Under the old Income Tax Act, 1961, Section 245 allowed the Assessing Officer (AO) to adjust any refund due to a taxpayer against any outstanding demand. The Income-tax Act 2025 carries this forward under Section 245A, with one important procedural requirement: the AO must give written intimation to the taxpayer and allow a minimum 30-day response window before making the adjustment.
Aspect
Old Act (Section 245)
New Act (Section 245A)
Provision name
Section 245 — Set-off of refunds against tax remaining payable
Section 245A — Adjustment of refund against outstanding demand
Prior notice required
Yes — intimation before adjustment
Yes — written intimation mandatory
Response time for taxpayer
30 days from notice date
30 days from intimation date (explicit in new Act)
Demands eligible for set-off
Any tax, interest, penalty outstanding
Any tax, interest, penalty, fee outstanding under new Act
Consequence of no response
Deemed consent; adjustment proceeds
Deemed consent; adjustment proceeds
Adjustment limit
Full refund can be adjusted
Full refund can be adjusted; excess demand stays alive
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The 30-Day Clock Is Absolute: Once the Section 245A notice lands in your e-filing inbox, the 30-day countdown begins immediately — regardless of whether you log in or read it. Set up SMS/email alerts on the e-filing portal for all compliance notices under your PAN. Missing this window means automatic adjustment with no further portal remedy.
What Triggers a Refund Adjustment Notice
Not every outstanding demand leads to a Section 245A notice. The AO (or CPC's automated system) checks the following before initiating adjustment:
Confirmed outstanding demand: The demand must be confirmed — not merely raised. If you've filed a rectification or an appeal that is pending, the demand should technically be under dispute.
Refund due in the current year: A refund must be crystallised and payable in the same PAN — refunds from one PAN cannot be adjusted against demand on another entity.
No stay order in force: If CIT(A), ITAT, High Court, or Supreme Court has granted a stay on the demand, the adjustment cannot be made.
No deposits exceeding demand: If you have deposited 20% of the demand as pre-deposit for an appeal, many AOs treat it as reduced demand — though this is not always automated at CPC level.
Common Trigger Scenarios
Trigger
Demand Origin
What Typically Goes Wrong
Old TDS mismatch
AY 2018-19 to AY 2022-23 processing intimations
TDS not reflecting in 26AS; deductor didn't file TDS return correctly
Unverified AIS data
CPC automated processing under Section 143(1)
Interest income or dividend income added by AIS but not reported in ITR
Revised return not processed
Original ITR processed with errors before revised ITR
Both demands live simultaneously; CPC adjusts against older demand
Unreported capital gains
STT/SFT data in AIS shows capital gains not declared
Short-term gain on mutual fund sale via broker not included in ITR
Old penalty not paid
Penalty under Section 271(1)(c) or old sections
Penalty from concluded scrutiny assessment years old, forgotten by taxpayer
Step-by-Step Response Strategy — The 30-Day Window
How to Respond to a Section 245A Notice
1
Log into e-filing portal immediately. Go to incometax.gov.in → e-Proceedings → Outstanding Demand. Note the exact demand details: assessment year, section under which demand raised, and the amount.
2
Verify the demand's origin. Cross-check the demand year's ITR acknowledgment, Form 26AS for that year, and any previous rectification filings. If the demand arose from a mismatch that has since been corrected (e.g., deductor filed revised TDS return), gather that evidence.
3
Respond via the portal. Under e-Proceedings → Response to Outstanding Demand, submit your response as: (a) "Demand is correct and paid" — with challan details, or (b) "Demand is incorrect" — upload supporting documents like corrected 26AS, TDS certificate, order copy, or stay order.
4
If a stay order is in force, upload the stay order copy and the appeal reference number (ARN). Click "Demand is under appeal — stay granted" and attach both documents. This should halt the adjustment process within 3–5 working days.
5
Take a screenshot with timestamp of your response submission confirmation. This is your proof of timely response. Download the acknowledgment PDF from the portal immediately.
6
If adjustment has already occurred (you received less refund than expected), file a grievance under the Jeevan Pramaan / e-Nivaran module on the portal — or directly call the CPC Bengaluru helpdesk at 1800-103-0025. The grievance must be filed within 30 days of refund credit.
Case Study: Rajesh's ₹55,000 Refund Swallowed by a 6-Year-Old TDS Demand
IT Consultant, Pune — AY 2026-27 Filing vs AY 2020-21 Demand
Rajesh, a senior IT consultant, filed his AY 2026-27 ITR in July 2026 expecting a ₹55,000 refund (excess TDS deducted by his employer). In August 2026, he received a Section 245A intimation: refund to be adjusted against ₹42,000 outstanding demand for AY 2020-21 (a processing intimation under old Section 143(1) that had flagged his savings bank interest).
Rajesh checked his AY 2020-21 record. He had declared the interest income in his ITR — but his bank had filed its SFT report late, and CPC had added the interest again from AIS, creating a ₹42,000 duplicate demand. He had never noticed the demand notification on the portal.
He logged into e-Proceedings and found the original AY 2020-21 intimation with the demand
He obtained a letter from his bank confirming the SFT correction filed in January 2023
He responded within 15 days with the bank letter and ITR extract showing the interest already declared
CPC reviewed and dropped the demand within 3 weeks; full ₹55,000 refund credited
Expected Refund
₹55,000
Wrongful Demand
₹42,000 (AY 2020-21)
Response Filed
Day 15 of 30-day window
Outcome
Full refund recovered
When the Adjustment Has Already Happened — Recovery Path
If you missed the notice and the refund was already adjusted, your options depend on whether the underlying demand is correct:
If the Demand Is Correct (But You Disagree With Quantum)
File a rectification application under Section 292 (Income-tax Act 2025) for any arithmetic or factual errors in the original assessment order.
File an appeal under Section 356 (new Act) before the Commissioner of Income-tax (Appeals) within 30 days of the order.
Pay 20% of the confirmed disputed demand as pre-deposit if you wish to stay the remaining demand while appeal is pending.
If the Demand Is Completely Wrong (Data Error / Duplicate)
File a Grievance on the e-filing portal under "Refund / Demand" category with documentary evidence.
For demands arising from old 143(1) intimations based on AIS data errors, approach the deductor/SFT filer for a correction certificate.
If CPC is unresponsive, escalate to your jurisdictional AO via a written representation, citing the incorrect data and requesting withdrawal of demand under Section 248 of the Income-tax Act 2025.
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Do NOT Ignore Old Outstanding Demands: Before filing your AY 2026-27 ITR, go to incometax.gov.in → e-File → Response to Outstanding Demand and clear any old unaddressed demands. If you have filed appeals, upload the appeal filing proof against each demand. Proactive clearance before ITR filing prevents the refund adjustment surprise entirely.
Penalties and Interest on Unaddressed Demands
Beyond refund adjustments, unresolved demands carry continuing costs under the Income-tax Act 2025:
Consequence
Applicable Section (New Act)
Rate / Impact
Simple interest on unpaid demand
Section 220(2) equivalent → Section 243 of new Act
1% per month from demand date until payment
Penalty for failure to pay demand
Section 221 equivalent → Section 444 of new Act
Up to 100% of tax in arrears; AO discretion
Recovery proceedings
Section 226 equivalent → new Act recovery chapter
Attachment of bank accounts, property; can be initiated after 30 days of demand
TDS default interest on short deduction
Section 201(1A) equivalent → Section 199 of new Act
1% per month (short deduction); 1.5% per month (non-remittance)
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Pre-Filing Demand Audit — Do This Every Year: Log into the e-filing portal 2–3 weeks before filing your ITR. Check three sections: (1) Response to Outstanding Demand, (2) View Rectification Status, and (3) Grievances. Clear or respond to every open item. This takes 20 minutes and prevents months of refund delays.
The AIS Mismatch — Root Cause of Most 2026 Adjustments
A significant portion of adjustment notices in the 2026 ITR season stem from Annual Information Statement (AIS) data discrepancies. The AIS aggregates data from multiple sources — banks, mutual funds, brokers, property registrars, and foreign remittance banks. When the AIS data differs from your ITR declaration, CPC raises a demand under the processing intimation.
Common AIS vs ITR Mismatches Causing Demands
Savings account interest: Multiple banks report interest; taxpayer declares net but misses one account
Dividend income: Dividend from old physical folio shares not in demat — not auto-populated in ITR portal pre-fill
Mutual fund redemptions: Switch transactions (Growth to IDCW) reported as "sale" in AIS but no gain since same folio
Employer stock options: ESOP perquisite reported twice — by employer in 26AS and by depository in AIS
NRI property sale: Property registrar reports full sale value; taxpayer correctly claims indexed cost — AIS shows gross proceeds as "income"
Refund Season 2026 — Pre-Filing Checklist
Log in to e-filing portal and check "Response to Outstanding Demand" for all assessment years
Download AIS and TIS from portal; reconcile with your actual income records
File AIS feedback for any incorrect data (option: "Income is not pertaining to me" or "Duplicate entry")
Verify Form 26AS for all TDS credits; cross-check with employer Form 16 and bank TDS certificates
For any demand under appeal, upload appeal order / stay order in e-Proceedings section
For demands already paid, upload challan details in "Demand Response" against each open demand
If deductor has filed a correction TDS return, obtain revised Form 16A before filing ITR
Screenshot every response submission with portal-generated acknowledgment number
No. Section 245A adjustment is PAN-specific. A refund due on your individual PAN cannot be adjusted against a demand on your proprietorship firm's PAN (same PAN, different entity type), partnership firm, HUF, or company — even if you are a partner or director. However, if you and your sole proprietorship share the same PAN (which they do), then all income and demand on that PAN are consolidated.
Yes — there is no time limit on which assessment year's demand can be adjusted against the current year's refund. Demands from AY 2010-11 onwards (or earlier, if still outstanding) are eligible. The critical condition is that the demand must be "confirmed" and not stayed. This is why pre-filing demand clearance is essential every year.
Yes. If you successfully appeal and the demand is reduced or deleted, the excess tax paid (including the amount that was "adjusted" from your refund) becomes refundable with interest under Section 244A of the Income-tax Act 2025. The interest rate is 6% per annum from the date of payment of the demand (or adjustment date) to the date of refund. This is a meaningful protection — but you must actually file the appeal to claim it.
The Income-tax Act 2025 treats service of notice through the e-filing portal as valid service — regardless of whether you read the email. Notices are deemed served once uploaded to your portal account. You are responsible for keeping your contact details and profile updated on the e-filing portal. If your registered email is wrong, update it immediately under "Profile → My Profile → Contact Details." Claiming non-receipt due to outdated contact info has not been accepted by courts as a ground to quash the adjustment.