Does Section 245 allow every refund to be withheld?

No. Withholding is subject to pending assessment or reassessment proceedings, recorded reasons and prior approval.

Which section replaces Section 245 under the Income-tax Act, 2025?

Section 438 addresses set-off and withholding of refunds.

INDIAN INCOME TAX LAW | UPDATED OCTOBER 2026

Section 245 of the Income-tax Act: Set-off and Withholding of Refunds

Q: Can the Income Tax Department adjust a refund against an old demand?

Yes, where a legally payable demand exists and the statutory written intimation requirements are followed.

Section 245 governs when an income-tax refund may be adjusted against outstanding tax dues and when payment of a refund may be withheld during pending assessment or reassessment proceedings. The provision was substantially rewritten in 2023 and amended again in 2024. From 1 April 2026, the corresponding provision under the Income-tax Act, 2025 is Section 438.

At a glance: A refund may be adjusted against an amount remaining payable by the same taxpayer, but written intimation of the proposed adjustment is required. Withholding of a refund during pending assessment proceedings is a separate power subject to written reasons, prior approval and a statutory time limit.

What does set-off of an income-tax refund mean?

A refund is money payable back to a taxpayer when tax paid or collected exceeds the amount legally due. An outstanding demand is an amount of tax or other sum remaining payable under the applicable income-tax law. A set-off means applying all or part of the refund against that outstanding liability instead of paying the entire refund into the taxpayer's bank account.

Set-off is distinct from withholding, which temporarily postpones payment of a refund where statutory conditions relating to pending assessment or reassessment proceedings are met.

Section 245 of the Income-tax Act, 1961

Section 245(1): Adjustment of refund against demand

Under the provision substituted by the Finance Act, 2023 with effect from 1 April 2023, specified income-tax authorities may adjust a refund, wholly or partly, against an amount remaining payable by the person entitled to that refund. The authority must give the person an intimation in writing of the proposed action before making the set-off.

Accordingly, a taxpayer should examine the year, amount and legal status of the demand identified in an adjustment intimation. A disputed or already-paid demand should be reconciled through the appropriate income-tax portal procedure and supporting records.

Section 245(2): Withholding during assessment or reassessment

Where a refund becomes due and assessment or reassessment proceedings are pending, the Assessing Officer may withhold the refund under Section 245(2), subject to reasons recorded in writing and previous approval of the Principal Commissioner or Commissioner. This power applies whether part of the refund has been adjusted under sub-section (1) or no such adjustment has been made.

The Finance (No. 2) Act, 2024 amended this sub-section with effect from 1 October 2024. It omitted the earlier wording requiring an opinion that release of the refund would adversely affect revenue, and extended the permissible withholding period to up to 60 days from the date on which the assessment or reassessment is made. This is a limit tied to the completion of assessment, not a general permission to withhold every refund for 60 days.

Why the old single-paragraph text is no longer sufficient

Before 1 April 2023, Section 245 primarily dealt with set-off against tax remaining payable. The Finance Act, 2023 substituted a two-part provision covering both adjustment and withholding; the 2024 amendment then changed the withholding conditions and end date. The historical text remains relevant to actions taken under the earlier law, but should not be treated as the current wording for later cases.

Section 438 of the Income-tax Act, 2025

The Income-tax Act, 2025 came into force on 1 April 2026. Section 438, titled Set off and withholding of refunds in certain cases, corresponds to Section 245 of the 1961 Act. Its principal components are:

Section 438(1): Authorised authorities may set off a refund against an amount remaining payable by the taxpayer. The amended statutory text also addresses amounts payable under the Income-tax Act, 1961.
Section 438(2): The proposed set-off requires written intimation to the taxpayer.
Section 438(3): The Assessing Officer may withhold a refund when assessment or reassessment is pending, with recorded reasons and previous approval of the prescribed senior authority, up to 60 days after the assessment or reassessment is made.

For earlier tax years, legacy demands and proceedings, the transitional and savings provisions must be considered before determining which enactment governs a particular action. Do not assume that the section number alone determines the applicable law.

Practical examples

Example 1: Refund adjusted against a valid demand

A taxpayer has a refund of Rs. 48,000 and an outstanding legally payable demand of Rs. 18,000. After the required written intimation, Rs. 18,000 may be adjusted and the balance Rs. 30,000 may be released, subject to any other applicable statutory restrictions.

Example 2: Demand already paid

If the refund is proposed to be adjusted against a demand already discharged, the taxpayer should provide challan details, payment records and the relevant order through the prescribed portal process. The proposed set-off should be checked against the correct outstanding balance.

Example 3: Refund withheld during pending reassessment

A refund becomes due while reassessment proceedings are pending. Withholding is not the same as adjusting the refund against a final demand: it requires the statutory approval and recorded reasons and is limited by the applicable time provision.

What to do if a refund is adjusted or withheld

Sign in to the Income Tax e-Filing portal and review refund, outstanding-demand and communication records.
Check whether the proposed demand relates to the correct PAN, tax year and amount, and whether any appeal, rectification or payment affects it.
Respond to the outstanding demand or proposed adjustment using the available portal facility; retain acknowledgement numbers and supporting documents.
For a withholding action, identify the pending assessment or reassessment and seek the recorded basis, approval and applicable statutory period where necessary.
If the demand is incorrect, pursue the appropriate statutory rectification, appeal or grievance mechanism. A refund adjustment communication does not itself replace the remedies against an underlying assessment order.

Refund interest, where applicable, is governed by the separate statutory rules, including Section 244A of the 1961 Act and Section 437 of the 2025 Act. The computation may depend on the circumstances and any periods excluded by law.

Frequently asked questions

Can the Income Tax Department adjust a refund against an old demand?

Yes, where an amount remains legally payable and the applicable provision permits set-off. Written intimation of the proposed adjustment is required. The validity and outstanding balance of the demand should be checked.

Does Section 245 allow the Department to withhold every refund?

No. Withholding under sub-section (2) is linked to pending assessment or reassessment proceedings and requires the prescribed written reasons and previous approval.

What changed on 1 October 2024?

The Finance (No. 2) Act, 2024 removed the specified adverse-revenue opinion wording and allowed withholding up to 60 days after assessment or reassessment is made.

What is the corresponding section in the Income-tax Act, 2025?

Section 438 deals with set-off and withholding of refunds under the new Act, which commenced on 1 April 2026.

Official law and resources

Legal note: This is a general explanation. The applicable enactment, tax year, transition rules, outstanding demand and procedural record must be examined for individual cases.