Section 438 Income Tax Act 2025: Can a Tax Refund Be Adjusted or Withheld?
A practical guide to the set-off of income-tax refunds against outstanding demands and the withholding of refunds during pending assessments under Section 438 of the Income-tax Act, 2025.
What does Section 438 provide?
Section 438 deals with two distinct situations. First, a refund that is otherwise payable to a taxpayer can be used to discharge an outstanding income-tax liability of that taxpayer. Second, a refund can be temporarily withheld where assessment or reassessment proceedings are pending, but only on the conditions stated in the law.
The provision does not make every refund automatically adjustable or indefinitely withholdable. The existence of a sum remaining payable, prior written intimation for set-off, and the specific approval and recording requirements for withholding are important safeguards.
Section 438 explained subsection by subsection
Section 438(1): Adjustment against outstanding tax
Where a refund becomes due or is found due, the authorised income-tax authority may set off all or part of it against a sum remaining payable by the same person under the Income-tax Act, 1961 or the Income-tax Act, 2025. The express reference to the 1961 Act was inserted by the Finance Act, 2026.
For example, a refund relating to a tax year governed by the 2025 Act may be adjusted against an outstanding demand from an earlier assessment year governed by the 1961 Act, subject to the statutory conditions.
Section 438(2): Written intimation before set-off
Before taking action under subsection (1), the authority must give the taxpayer written intimation of the proposed adjustment. A taxpayer should check the underlying demand, any payments already made, appeal orders, rectification orders and any stay or other relief affecting the demand.
Section 438(3): Withholding during assessment or reassessment
If a refund remains due, whether after partial set-off or without any set-off, the Assessing Officer may withhold it in view of pending assessment or reassessment proceedings. The Assessing Officer must record reasons in writing and obtain previous approval from the Principal Commissioner or Commissioner. The statutory period extends up to 60 days from the date on which the assessment or reassessment is made.
Pending proceedings alone should not be treated as dispensing with the requirements of recorded reasons and prior approval. The provision should also be considered alongside the rules governing interest on refunds under Section 437.
Relevant statutory concepts
Illustrative examples of refund adjustment
| Situation | Refund due | Outstanding demand | Illustrative result |
|---|---|---|---|
| Valid demand lower than refund | Rs. 80,000 | Rs. 25,000 | Rs. 25,000 may be set off; Rs. 55,000 remains refundable, subject to other lawful action. |
| Valid demand exceeds refund | Rs. 30,000 | Rs. 48,000 | Up to Rs. 30,000 may be set off; Rs. 18,000 remains outstanding. |
| Demand already discharged | Rs. 40,000 | Nil after payment | No set-off should be based on a demand that is no longer payable. |
These examples assume the demands are legally payable and the required intimation has been given. They do not determine the outcome of a disputed demand or any withholding decision under subsection (3).
What should a taxpayer do after receiving a proposed refund adjustment?
- Check the assessment year or tax year, demand reference, amount and proposed refund set-off.
- Compare the demand with challans, tax credits, rectification orders, appeal orders and any demand stay.
- Use the applicable response facility on the official income-tax e-Filing portal and submit supporting documents where necessary.
- If the demand is incorrect, pursue the appropriate statutory correction or appeal procedure; a refund objection alone may not eliminate the underlying demand.
- If the refund is withheld, seek the recorded basis and verify the approval and statutory time limits applicable to subsection (3).
Frequently asked questions
Can a refund under the 2025 Act be adjusted against a demand under the 1961 Act?
Yes. Section 438(1), as amended by the Finance Act, 2026, expressly covers sums remaining payable under either Act.
Is advance written intimation necessary?
Yes. Section 438(2) requires written intimation of the proposed set-off before action under subsection (1).
Can a refund be withheld simply because reassessment is pending?
Section 438(3) permits withholding in the specified circumstances, but the Assessing Officer must record reasons in writing and obtain previous approval from the Principal Commissioner or Commissioner.
How long may the refund be withheld under Section 438(3)?
The provision authorises withholding up to 60 days from the date on which the assessment or reassessment is made, subject to its conditions.
Does Section 438 replace the right to claim interest on refunds?
No. Interest on refunds is separately governed by Section 437, and its application depends on the relevant facts and statutory conditions.
Official law and related provisions
Read the official Income-tax Act, 2025 as amended by the Finance Act, 2026, the Finance Act, 2026 (Section 97) and the Income Tax Department Section 438 page. For taxpayer services, visit the official e-Filing portal.
Related reading: Section 431: Right to refund, Section 435: Refund on appeal, and Section 437: Interest on refunds.
This article explains the law for general information. The outcome of any individual refund dispute depends on the applicable statutory provisions, orders and facts.