Income Tax Notice Under Section 245: Adjustment of Refund (2026)

How to · Income Tax · Refund adjustment

Updated for 2026 · Claw Editorial

A notice under Section 245 is a warning, not a final step. It tells you the department plans to keep part or all of a refund you are owed and use it to clear an old tax demand. You get a short window to object before that happens. This page explains what a Section 245 notice is, how the set off works, the window to respond, and what to do when the old demand is wrong or already disputed. Last verified October 2026.

01What a Section 245 notice is

A notice under Section 245 of the Income-tax Act, 1961 is a prior intimation. The department tells you that a refund due for one year will be adjusted, in whole or in part, against an outstanding tax demand from another year. The key word is prior. The notice comes before the adjustment, and you have a right to respond.

Section 245 gives the department the power to set off a refund against a demand. But courts have repeatedly held that the department must first give you an intimation and a real chance to object. An adjustment made without that opportunity can be set aside.

02How the set off works

The process usually runs like this:

1. Your return for a year is processed and a refund is found due.
2. The system sees an outstanding demand against you for another year.
3. Before releasing the refund, the department sends a Section 245 intimation proposing to adjust the refund against that demand.
4. You respond on the income tax portal, agreeing or disagreeing with the demand.
5. Based on your response, the refund is either released, adjusted in part, or adjusted in full.

03The window to respond

The standard practice is that you are given twenty one days to respond to a Section 245 intimation. If you do not respond within that time, the department may proceed with the adjustment.

This window matters. Courts have criticised adjustments made before the response time was over. If a notice gives you twenty one days, the department should wait out that period before touching the refund. The exact administrative time lines have been revised over the years, so read the days stated in your own notice.

04How to respond

1. Log in to the portal. Open the pending Section 245 intimation and the outstanding demand it refers to.
2. Decide on the demand. Check whether the old demand is correct, already paid, or disputed.
3. If the demand is correct: agree to the adjustment. The refund is used to clear it, and any balance is released.
4. If the demand is wrong or paid: disagree, and attach proof, such as a challan for a payment already made or a rectification already filed.
5. Respond within the window. Submit before the days stated in the notice run out, and keep the acknowledgement.

If the old demand came from a processing error, you may also need to file a rectification under Section 154 to clear it at source. If the demand came from an earlier intimation, see the Section 143(1) intimation.

05If the old demand is already disputed

Where the old demand is already under appeal, the department cannot freely adjust the whole refund against it. Instructions and court decisions limit how much can be held back while an appeal is pending, and a prior Section 245 intimation is treated as a necessary step before any adjustment.

If your refund is adjusted despite a pending appeal, or without the proper intimation, that adjustment can be challenged, including before the High Court in a suitable case. Keep records of the appeal and any stay you have obtained.

06Where Claw fits

Claw is an all-in-one legaltech platform for Indian advocates, law firms, and corporate legal teams, combining AI-based case search, an AI legal assistant (Legal GPT), case management, and compliance automation across all Indian courts and tribunals.

A quarrel over a refund set off can grow into an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal, and sometimes a writ in the High Court where a refund was adjusted without the prior intimation or during a pending appeal. On questions like these Claw does two jobs. You can search more than 30 crore judgments, from the Supreme Court since 1950 and the High Courts since 1990, to see how courts have treated set offs under Section 245 and the limits on holding back a refund, with results in under five seconds. And you can keep your own matter in view, by party or advocate name, across the 9,102 courts, benches and forums Claw tracks.

Claw does not use customer case documents to train its AI models, so the proof you gather stays your own. Set up a free Claw account to see how refund adjustments have been decided and to follow your matter. To research the wider body of law, see case search across Indian courts.

07Sources and further reading

• Income Tax e-filing portal: incometax.gov.in
• Income Tax Department (Act and sections): incometaxindia.gov.in
• India Code (bare Act): indiacode.nic.in
• Claw: clawlaw.in

This page is general information, not legal advice. The law and administrative instructions change, so check the current text and take advice from a tax professional before you act.

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