Section 438 of the Income-tax Act, 2025 — Set Off and Withholding of Income Tax Refunds

In plain language

What Section 438 actually says

Section 438 of the Income-tax Act, 2025 (effective from 1 April 2026) gives the Income Tax Department two related powers over a refund that is otherwise payable to you: (a) to set off (adjust) that refund against tax you still owe, and (b) to withhold (hold back) a refund for a limited time when your assessment or reassessment is still going on. It is the direct successor to the well-known Section 245 of the Income-tax Act, 1961, and the working rules are broadly carried forward.

• Set-off (sub-section 1): Where a refund becomes due to any person, the Assessing Officer, Commissioner, Principal Commissioner, Chief Commissioner or Principal Chief Commissioner may, instead of paying the refund, set off the whole or any part of it against any sum remaining payable by that person under the Act.
• Mandatory written intimation (sub-section 2): No set-off can be done in the dark. The Department must first give you a written intimation of the action it proposes to take, so you get a chance to respond.
• Withholding (sub-section 3): Where a refund is due and assessment or reassessment proceedings are pending in your case, and the officer is of the opinion that granting the refund may adversely affect revenue, the refund may be withheld — with reasons recorded in writing and after prior approval of the Principal Commissioner or Commissioner — up to 60 days from the date the assessment/reassessment is completed.

Who it applies to

It applies to every category of taxpayer — salaried individuals, pensioners, self-employed professionals, firms, LLPs, companies, HUFs and NRIs — anyone to whom a refund is due while there is either an existing demand or a pending assessment. The refund can arise from excess TDS, advance tax, self-assessment tax or a favourable appeal order.

Set-off: adjusting your refund against old demand

• The demand adjusted against must be a sum "remaining payable under this Act" — i.e. a subsisting, legally enforceable tax demand.
• Set-off can be full or partial: if the demand is smaller than the refund, only that part is adjusted and the balance is paid to you.
• The written intimation is a condition, not a courtesy. Under the parallel Section 245 (1961), courts (including the Calcutta and Delhi High Courts) repeatedly quashed adjustments made without a proper prior intimation or against a demand that was stayed or not crystallised. That protection continues under Section 438.

Withholding: pressing pause during assessment

• Withholding is only available while assessment or reassessment proceedings are pending — it cannot be used as a general delaying tactic once assessment is over.
• It needs two safeguards: reasons recorded in writing by the Assessing Officer and prior approval of the Principal Commissioner/Commissioner.
• The clock is capped: the refund cannot be withheld beyond 60 days from completion of the assessment/reassessment. After that, it must be released (with interest, where due).

How it interacts with related sections

• Interest on refunds (Section 437): If your refund is delayed by withholding, interest under Section 437 generally continues to run, so genuine delay is compensated.
• Refund of tax (Section 433/434 framework): Section 438 operates only after a refund is determined to be due; it decides whether that refund is paid, adjusted or briefly held.
• Recovery provisions: Set-off is one of the Department's recovery tools, sitting alongside normal demand-and-recovery machinery.

Practical implications for taxpayers

• Always read the intimation. If you get a Section 438 (earlier Section 245) intimation on the e-filing portal, respond within the time allowed — agree, disagree, or say "demand already paid/stayed" with proof.
• Reconcile your demand register. Old, wrong or already-paid demands are a common cause of unfair adjustments; get them corrected or reflected as "stayed/paid".
• Track the 60-day limit. If your assessment is complete and 60 days have passed, you can press for release of a withheld refund.
• Silence can be treated as acceptance, so never ignore a set-off intimation.