Outstanding Tax Demand: How to Check, Respond and Get It Cancelled (AY 2026-27)

You filed your ITR for AY 2026-27, claimed a refund of Rs 32,400, and waited. Then the status changed to "Refund Adjusted Against Outstanding Demand" and you received nothing. The demand it was adjusted against is from AY 2016-17 - a year you barely remember, for tax you are fairly sure you already paid.

An outstanding demand does not disappear on its own. It silently accrues interest, and it keeps swallowing every future refund until you deal with it. The good news is that most old demands are wrong, and the e-filing portal gives you a self-service route to challenge them.

What "Outstanding Demand" Actually Means

An outstanding demand is a tax liability the department has raised against you that remains unpaid on its records. It is formally communicated through a notice of demand under Section 156, which gives you 30 days to pay.

Demands are raised in several ways:

• The CPC processes your return under Section 143(1) and computes a higher liability than you did
• An Assessing Officer completes a scrutiny assessment under Section 143(3) and adds income
• A rectification or appeal effect order recomputes your liability upward
• Interest under Sections 234A, 234B or 234C is charged that your self-assessment payment did not cover

Whatever the origin, once the 30 days from the Section 156 notice expire, two things start happening: interest under Section 220(2) begins to run, and the demand becomes eligible for set-off against any future refund.

Where to Check Your Outstanding Demand

Log in to the e-filing portal and go to Pending Actions > Response to Outstanding Demand.

This is your demand register. For each entry it shows the assessment year, the Document Identification Number (DIN), the section under which the demand was raised, the original amount, the interest accrued so far, and crucially, whether it was uploaded by the CPC or by your jurisdictional Assessing Officer.

That last field decides who you deal with. CPC demands are resolved online through rectification. AO demands usually need a response, and sometimes a visit or an e-Proceedings submission, to your jurisdictional officer.

Check this page even when no refund is pending. Most taxpayers discover a six-year-old demand only when it eats their current refund, by which time interest has often doubled it.

Why Old Demands Are Usually Wrong

Before you pay anything, understand that a large share of legacy demands are bookkeeping failures, not real liabilities.

Only the last row deserves a payment. The rest deserve a response.

Section 245: How Your Refund Gets Taken

Section 245 allows the department to set off a refund due to you against any demand outstanding on its records. Sub-section (1) requires that you first be given an intimation in writing of the proposed adjustment. In practice, CPC issues this intimation by email and posts it under Pending Actions, giving you 30 days to respond.

If you respond and disagree, the demand is not adjusted mechanically. Where the Assessing Officer does not accept your objection, the matter is escalated to the jurisdictional authority for a decision before the set-off is made. If you do not respond at all within 30 days, silence is treated as acceptance and the adjustment goes through.

Note that Section 245(2) also permits the department to withhold a refund entirely, with the prior approval of the Principal Commissioner, where an assessment or reassessment is pending and granting the refund would adversely affect the revenue. That withholding lasts until the assessment is completed.

The practical rule: a Section 245 intimation is the one notice you should never let lapse. Responding costs ten minutes and preserves every argument you have.

How to Respond on the Portal

Open the demand entry and choose one of two positions.

"Demand is correct"

Select this only if you have verified the computation and intend to pay. This is a one-way door - once you agree, you cannot later dispute the same demand, and your only remaining remedy is a rectification if a genuine mistake apparent from the record exists.

"Disagree with demand (either in full or part)"

Select this if any portion is wrong. You enter the amount you accept and the amount you dispute, then pick a reason:

• Demand paid - enter the challan BSR code, payment date and serial number
• Demand already reduced by rectification or revision - quote the order details and DIN
• Demand already reduced by appellate order - where the appeal effect is still to be given
• Appeal filed - with stay petition filed, stay granted, or instalments granted
• Rectification or revised return filed at CPC
• Rectification filed with the Assessing Officer
• Others - free-text, for cases such as duplicate entries or unallowed TDS credit

Attach supporting documents. A response saying "already paid" with no challan reference will be rejected, and you will have spent the 30 days for nothing.

If the underlying problem is a processing error, the response alone is not the fix. File a rectification request under Section 154 for that assessment year in parallel, so the demand entry is actually deleted rather than merely flagged as disputed. Our guide to the Section 143(1) intimation and rectification process walks through that filing in detail.

Interest Under Section 220(2) Keeps Running

This is the part that turns a small demand into a painful one.

Section 220(2) charges simple interest at 1% per month or part of a month on the unpaid amount, from the day after the 30-day period in the Section 156 notice expires, until you pay.

A demand of Rs 12,000 raised for AY 2016-17 and left untouched for ten years accrues roughly Rs 14,400 in interest, so the entry now reads about Rs 26,400. This interest runs even while you are disputing the demand, unless a stay has been granted.

If the disputed amount is small and your case is arguable rather than airtight, paying it and closing the entry is often cheaper than winning three years later. If the amount is significant and your evidence is solid, dispute it and seek a stay. Ignoring it is the only option with no upside. Under Section 220(4) you become an "assessee in default", which exposes you to a penalty under Section 221 of up to the amount of the tax arrear, on top of the interest.

Paying a Demand Correctly

Go to e-File > e-Pay Tax, select the assessment year of the demand, and choose type of payment (400) Tax on Regular Assessment under major head 0021.

The minor head matters more than people expect. Paying a demand under minor head 300 (self-assessment tax) instead of 400 is the single most common reason a paid demand still shows as outstanding months later. After paying, go back to the demand entry and submit a response with the challan details so the payment is tagged to that specific demand.

Getting a Stay Under Section 220(6)

If you have filed an appeal before the Commissioner (Appeals) against the order that created the demand, you can apply to the Assessing Officer under Section 220(6) to be treated as not in default while the appeal is pending.

Under long-standing CBDT instructions, the AO will normally grant a stay on payment of 20% of the disputed demand, with the balance held in abeyance until the appeal is decided. The AO has discretion to require less in strong cases, or more in weak ones. Apply in writing, attach the appeal acknowledgement, and do it before the recovery machinery starts, not after your bank account has been attached.

Small Legacy Demands May Already Be Extinguished

Following the Interim Budget 2024 announcement, the CBDT ordered the remission of small outstanding demands as they stood on 31 January 2024:

• Up to Rs 25,000 per demand entry for assessment years up to AY 2010-11
• Up to Rs 10,000 per demand entry for AY 2011-12 to AY 2015-16
• Subject to an overall ceiling of Rs 1,00,000 per taxpayer

These entries were to be extinguished without any application from the taxpayer, and no credit or refund can be claimed for a remitted amount.

If your demand register still shows a qualifying legacy entry, and worse, if a current refund is being adjusted against it, raise a grievance under Grievances > Submit Grievance citing the CBDT remission order and the demand DIN.

The Practical Sequence

1. Open Pending Actions > Response to Outstanding Demand today, refund pending or not
2. For each entry, pull the corresponding intimation or assessment order and identify what created it
3. Reconcile against Form 26AS, the AIS and your challans for that year
4. Respond within 30 days of any Section 245 intimation, always
5. Where the demand is wrong, file a rectification under Section 154 in parallel so the entry is deleted
6. Where it is right, pay under minor head 400 and tag the challan to the demand
7. Re-check the register after four to six weeks to confirm the entry is gone

Most of these demands trace back to a mismatch between what a return claimed and what the department's records showed at the moment of processing. Reconciling your Form 16, Form 26AS and AIS before you file is what stops the next one from being created - 49Tax cross-checks those three sources automatically while preparing your return, so a TDS entry that has not landed in 26AS gets flagged before it becomes a demand two years later. If a refund is already stuck, our guide on tracking refund status and fixing delays covers the re-issue route once the demand is cleared.

Key Takeaway

An outstanding demand is not settled by ignoring it, and it is rarely settled by paying it blindly either. Check your demand register this week, respond to every Section 245 intimation within the 30-day window, and file a rectification for anything that traces back to a TDS or challan mismatch. The interest clock at 1% per month is the reason speed matters more than being right.