No loss of income tax refund under new Income Tax Act 2025: Loss can be set-off with tax refund due under old 1961 Income Tax Act

To give taxpayers more clarity about income tax refunds, the government in its explanatory memorandum to the amended Finance Bill, 2026 has said that any refund which is coming under Income Tax Act, 1961 can be set-off against any tax demand payable under Income Tax Act, 2025 and vice versa.

For the uninitiated, under Section 245 of the Income Tax Act, 1961, the tax department had power to set-off any tax refund amount without any past years’ tax demand amount. So this is now clarified that the same aspect will continue under the new Income Tax Act, 2025 also.

For example:

You submitted your Income Tax Return (ITR) in 2025 according to the Income Tax Act of 1961 and are expecting a tax refund of around say Rs 10,000. however, you also have an outstanding tax demand of Rs 5,000 from 2002.

Under Section 245, the tax department could have adjusted the Rs 5,000 tax demand with the Rs 10,000 tax refund due and give you a net Rs 5,000 tax refund. Now, if you are filing your ITR under Income Tax Act, 2025, a separate legal document is created. This amendment in the Finance Bill, 2026 makes it clear that the old and new tax Acts can work together seamlessly for this particular situation.

S. Sriram, Executive Partner, Lakshmikumaran and Sridharan attorneys, said to ET Wealth Online: "As per the originally proposed Bill, a possible reading of the provisions was that, the tax refunds under the 1961 Act could not have been adjusted against tax demand dues that might arise under the 2025 Act, and the vice versa. The amendment which has now been carried out, and as clarified by the Memorandum, enables the adjustment of refunds and demands, irrespective of whether the arose under the 1961 Act or the 2025 Act."

Don’t be surprised if you get lesser income tax refund this year, the income tax dept is adjusting past dues against this year’s refund

Clarity on set-off and withholding of refunds

As per Income-tax Act, 2025, any refund arising thereunder may be set off against the amount payable under the said Act. Same is the provision in the Income-tax Act, 1961. There may be a refund due under Income-tax Act, 1961 which needs to be set off against the amount payable under Income-tax Act, 2025.

Conversely, there may be a refund due under Income-tax Act, 2025 which is required to be set off against the amount payable under Income-tax Act, 1961.

Accordingly, it is proposed to allow the set-off of refund with amount payable irrespective of the fact whether the refund or the amount payable was under Income-tax Act, 1961 or Income-tax Act, 2025.

The amendment is proposed in Income-tax Act, 1961 as well as Income-tax Act, 2025. The date of effectivity for Income-tax Act, 1961 shall be from 30th March 2026 and for Income-tax Act, 2025, it shall be April 1, 2026.