Refund Adjustment Under Section 245

Imagine you are an NRI who has fulfilled your Indian tax obligations and is waiting for your claimed tax refund to be credited to your account. However, instead of that, you got a notice that the income tax refund was used for debts. In this situation, you get confused and tense about where your refund amount goes. If this happened to you, then do not worry, as you are not alone in this. 

Like you, many taxpayers and NRIs face this situation every year, in which their claimed tax refunds are adjusted against their outstanding dues. It is known as a tax offset or tax adjustment. Yes, it is frustrating, especially when you are waiting for the money to be credited. 

Confused and want to know more about the income tax refund adjustment notice and what the consequences of it are? Read the blog and get your answers.

What Does "Refund Used for Debts" Actually Mean?

A notice received from the income tax stating "Refund Used for Debts" simply means your tax refund is used to pay off your outstanding dues. These dues could be:

• Penalties or interest
• Income tax demand for the previous year
• Government-related liabilities

In India, a refund used for debts is done under Section 245 of the Income Tax Act 1961. Considering this, when the Income Tax Department processes your return and finds out you have an outstanding tax demand, it has the authority to adjust the refund amount against your old tax demand. 

However, before they process this adjustment, they send an intimation notice under section 245 informing you about the proposed adjustment, providing you with an opportunity to express your opinion. It is not the final order of the tax official, but a communication asking whether you are okay with the adjustment or not. 

This notice is available in your e-filing Income Tax Portal inbox and your registered email. So, in case you did not get the tax refund, check the mentioned things. Additionally, you can also check the refund adjustment status by clicking on "view filed returns" available on the portal. To see the full details, you can also opt for the income tax notice PDF download from the portal. 

This was all about "refund used for debts," meaning. Moving ahead, let's know why your income tax refund was adjusted. 

Why Was Your Income Tax Refund Adjusted?

Let's be practical. Not always you will get your income tax refund into your bank account. It is because, as mentioned earlier, if you have pending tax obligations, the tax officials can adjust them. Considering this, common reasons for adjusting income tax refund are as follows:

• Interest or penalties
• Outstanding tax from previous assessment years
• Incorrect ITR filing or mismatch
• Tax demand raised after assessment
• Legal dues or government recovery

Sometimes, even small errors such as missed interest calculations under section 234A 234B or 234C also trigger a tax demand. Apart from this, refund adjustments can also arise from reprocessed returns or rectification orders where previous underreporting has been corrected. In some cases, demands raised during scrutiny or reassessment proceedings also lead to partial or full refund adjustments. 

These are some of the most common reasons why your income tax refund is adjusted. Moving further, let's know what the refund adjustment under section 245 is. 

What is Refund Adjustment Under Section 245?

Section 245 of the Income Tax Act, 1961, gives the tax officials the power to set off a tax refund of the taxpayer against any outstanding tax demand from a previous financial year. However, they can make such an adjustment after sending an intimation notice to the taxpayer and allowing them to respond. 

It is an essential procedural safeguard. Considering this, the tax department cannot simply adjust your refund without informing you. If the adjustment is made without sending an intimation notice under section 245, it is considered invalid, and on those grounds, you can raise a grievance on the e-filing portal. 

Key points about Section 245 of the Income Tax Act:

• The tax adjustment can be either fully or partially done, depending on the refund amount and the outstanding tax demand.
• If the tax refund is more than the demand, after adjusting the demand amount, the remaining is credited to your bank account. 
• If the tax demand is more than the refund, the complete refund amount is adjusted, and the remaining tax demand stays outstanding.
• The intimation notice should be sent before adjusting the refund, not after that.
• Taxpayers have the right to agree fully, partially, or fully disagree with the proposed refund adjustment. 

Further, this income tax notice after ITR is processed, generally contains the following information:

• The assessment year for which the tax refund is due
• The refund amount that has been processed
• The assessment year(s) and amount(s) of the outstanding tax demand being adjusted
• The remaining refund balance, if it is more than the tax demand
• A deadline to submit your response. It is usually 30 days from the date you receive the notice

This was about a refund adjustment under section 245. Moving forward, let's know how to respond to the intimation notice sent under this section.

How to Respond to Section 245 Intimation Notice?

Under section 245, once you receive the intimation notice, carefully read it and check all the mentioned details along with the time stated to respond to the notice. It is generally 30 days from the date of issue. It is because if you do not take action on time, then the tax official considers it as if you agree with the adjustment and processed further. 

Here are two possibilities: either you agree with your refund adjusted with your outstanding tax demand, or you do not. 

If You Agree with the Outstanding Demand

Follow the steps below if you agree to a refund adjustment with the outstanding demand notice:

• Step 1: If you are okay with the outstanding demand, visit the Income Tax e-filing portal and use your credentials to log in to your account.
• Step 2: Now go to Pending Action Tab → Response to Outstanding Demand → Submit Response → Demand is Correct → Submit.
• Step 3: After submitting your response, verify that it was recorded successfully. Even if you do not act on time, the tax demand is adjusted automatically with your refund. 

If You Do Not Agree/ Partially Disagree with the Outstanding Demand

In case you do not agree/ partially disagree with the refund adjustment for the outstanding demand, follow the mentioned steps:

• Step 1: Log in to the Income Tax e-filing portal using your ID and password.
• Step 2: Go to the Pending Action Tab → Response to Outstanding Demand → Submit Response → Disagree with Demand (Either in Full or Part) → Submit.
• Step 3: In this situation, you also need to submit the reasons for partial or full disagreement with the demand. It includes demand paid, an appeal has been filed, demand has already been reduced by revision/ rectification, and more. 
• Step 4: After that, verify that your submission and reasons have been recorded successfully. Additionally, make sure to have a record of your sent response and follow up with the tax department. 

*For NRIs: If the outstanding tax demand relates to a year when your residential status was not clear, or if, under section 195, TDS was deducted at a higher rate than what the DTAA offers. In this situation, clearly explain why you do not agree with the adjustment and submit important documents like the Tax Residency Certificate (TRC), passport travel records, Form 10F, or details about your DTAA benefits. It is also advisable to consider taking help from a Chartered Accountant to handle this situation easily.

This is how you should respond to an income tax refund adjusted notice. Moving ahead, let's know the consequences of not responding to the section 245 intimation notice.

Consequences of Not Responding to Section 245 Intimation Notice

Not responding to the section 245 intimation notice is the most costly mistake you made. It is because the Income Tax Department treats your silence as agreement and proceeds with the refund adjustment. Additionally, beyond not getting the refund, here is what else you can face:

• The Remaining Tax Demand Stays Active: If the outstanding tax demand is more than the refund, the unpaid amount under section 220(2) attracts interest at 1% per month. Additionally, the future refunds will also be adjusted with this outstanding tax demand.
• Recovery Proceedings May Follow: For significant outstanding tax demands, the tax department under section 222 can initiate recovery. It includes asset and bank account attachment seizure. For NRIs holding NRO accounts or Indian properties, it is a real risk.
• Future Compliance Gets Difficult: Sometimes, outstanding tax demands block your ability to obtain an NOC for property transactions, get a lower TDS certificate, or clear a compliance check. The longer your tax demand remains unsolved, the more it impacts your overall tax standing.
• Grievance Route Becomes Harder: Once the tax adjustment is made and the response deadline has passed, reversing the decision requires a rectification process or separate grievance. This further takes more effort and time than answering the original section 245 intimation notice. 

These are the consequences you face when you do not respond to a section 245 notice. 

Final Thoughts

Lastly, an income tax refund adjustment notice may feel daunting, but it is simply a process where the tax department adjusts your outstanding dues. The key behind it is to know the reason, check your returns, and answer the notice on time. In many cases, you can correct the issue if you handle it properly. Additionally, ignoring may result in one of your costly mistakes.

Furthermore, if you are facing an issue in responding to the notice, connect with Savetaxs. We will provide you with expert guidance and draft an accurate response as per your situation. Our team ensures your response aligns with Indian tax law, which further removes the chances of more queries. So connect with us, and resolve your income tax issue confidently and quickly.