Set-off and Withholding of Income Tax Refunds: Section 438 of the Income Tax Act 2025

Under section 438 of the Income-tax Act, 2025, the tax department can keep your refund and apply it against tax you still owe (set-off), after giving you written intimation. Separately, if your assessment or reassessment is pending, the Assessing Officer can withhold the refund for up to sixty days from the date the assessment or reassessment is made, but only for recorded reasons and with prior approval from a senior officer.

This guide explains both powers, who can use them, what you can expect to receive in writing, and how to deal with them. All points below come from section 438 as amended by the Finance Act, 2026, effective 1 April 2026. Last reviewed against that text on 10 November 2026.

What does section 438 of the Income-tax Act, 2025 do?

It gives the department two separate tools for a refund that is due to you:

• Set-off (section 438(1) and (2)): instead of paying the refund, the department adjusts it against a sum that remains payable by you.
• Withholding (section 438(3)): where assessment or reassessment proceedings are pending, the department holds back the refund for a limited time.

The two work independently. A set-off reduces or replaces the refund. A withholding delays whatever refund is left.

	Set-off	Withholding
Section	438(1) and (2)	438(3)
What happens to the refund	All or part is adjusted against your outstanding dues	Paid later, not adjusted
Trigger	A refund is due and a sum is remaining payable by you under the 1961 Act or the 2025 Act	A refund is due and assessment or reassessment proceedings are pending
Who acts	Assessing Officer, Commissioner, Principal Commissioner, Chief Commissioner or Principal Chief Commissioner	Assessing Officer
Safeguard	Prior intimation in writing to you	Reasons recorded in writing and previous approval of the Principal Commissioner or the Commissioner
Time limit	None stated in the section	Up to sixty days from the date the assessment or reassessment is made

When can the department set off my refund against old dues?

Section 438(1) applies where a refund "becomes due or is found to be due" to you under the Act. The authority may then, instead of paying it, set off the whole refund or any part of it against the sum remaining payable by you.

The dues can arise under either law. The words "the Income-tax Act, 1961 or" were inserted by the Finance Act, 2026 with effect from 1 April 2026. So an unpaid demand under the 1961 Act can now be adjusted against a refund due under the 2025 Act.

Do I get notice before my refund is adjusted?

Yes. Section 438(2) says any action under sub-section (1) must be taken only after giving you an intimation in writing of the action proposed. The section does not prescribe a form or a response period, so check the intimation itself for what it asks you to do and by when.

Can the officer hold back my refund while assessment is pending?

Yes, within limits. Section 438(3) applies whether a part of the refund was set off under sub-section (1) or nothing was set off. If the refund is due and assessment or reassessment proceedings are pending against you, the Assessing Officer may withhold it, but:

1. the officer must record the reasons in writing;
2. the officer needs the previous approval of the Principal Commissioner or the Commissioner; and
3. the withholding runs up to sixty days from the date on which the assessment or reassessment is made.

The sixty days are counted from the date the pending assessment or reassessment is made, not from the date the refund became due.

How does a set-off work? Two worked examples

Assumptions: tax year 2026-27 figures are used for illustration. The amounts are invented, and interest and other adjustments are left out to keep the arithmetic visible.

Example 1: partial set-off. Meena's return shows a refund of Rs 48,000. The department's records show an unpaid demand of Rs 30,000 against her under the 1961 Act. After written intimation under section 438(2), the department sets off the demand.

Step	Amount (Rs)
Refund due	48,000
Less: set-off against unpaid demand	(30,000)
Refund left to be paid	18,000
Demand remaining after set-off (30,000 - 30,000)	0

Example 2: set-off and withholding together. A firm has a refund of Rs 2,50,000 and a pending demand of Rs 1,00,000. Its reassessment is also pending. The officer sets off Rs 1,00,000 and, with recorded reasons and approval, withholds the balance.

Step	Amount (Rs)
Refund due	2,50,000
Less: set-off under 438(1)	(1,00,000)
Balance refund	1,50,000
Withheld under 438(3), up to 60 days from the date reassessment is made	1,50,000
Paid now	0

Real-life scenarios

Ravi and the forgotten demand. Ravi, a salaried employee, has not looked at his old demand for years. His refund this year is Rs 12,000 and the demand is Rs 20,000. He receives a written intimation proposing to set off the whole refund. He checks the demand, finds it is genuine, and pays the remaining Rs 8,000. The intimation gave him the chance to check before money moved.

Sunita and the pending reassessment. Sunita runs a small business and expects a refund. Her reassessment is pending, so the Assessing Officer withholds the refund after recording reasons and getting approval. Sunita asks for a copy of the reasons. Her reassessment is completed on 10 June, so the withholding can run up to sixty days from 10 June.

What should I do if my refund is set off or withheld?

• Read the intimation. Match the demand it names to your own records, including demands under the 1961 Act.
• Check the section. The set-off power is in 438(1) and (2). A withholding must refer to pending assessment or reassessment and recorded reasons.
• Note the date. For a withholding, count the sixty days from the date the assessment or reassessment is made.
• Pay or contest the demand. This section does not say how to dispute a demand. Use the process in the intimation or take professional advice. If you appeal, tax payable pending appeal and stay of demand may apply.

Common mistakes

• Assuming dues under the 1961 Act cannot touch a 2025 Act refund. Section 438(1) now covers both.
• Treating a withholding as indefinite. Section 438(3) caps it at sixty days from the date the assessment or reassessment is made.
• Counting the sixty days from the refund date. The count starts from the date of assessment or reassessment.
• Ignoring the intimation. Section 438(2) requires one before a set-off. Missing it means missing the chance to point out an error.
• Confusing set-off with withholding. One adjusts the refund against dues. The other only delays payment.

Quick reference

Question	Answer	Provision
Can a refund be set off against dues?	Yes, all or part	438(1)
Which laws can the dues arise under?	1961 Act or 2025 Act	438(1)
Is notice needed before set-off?	Yes, intimation in writing	438(2)
Can a refund be withheld?	Yes, if assessment or reassessment is pending	438(3)
Approval needed to withhold?	Previous approval of Principal Commissioner or Commissioner	438(3)
How long?	Up to sixty days from the date the assessment or reassessment is made	438(3)

Where this is in the Act

• Section 438(1): set-off of refund against sums payable under the 1961 Act or the 2025 Act
• Section 438(2): intimation in writing before set-off
• Section 438(3): withholding of refund while assessment or reassessment is pending
• Related reading: refund claims, limitation and interest

How can CA firms keep track of client refunds and dues?

When a client's refund is adjusted or held, the useful question is which demand it went against and when the sixty days end. Finexo's practice management software lets a CA firm log notices and intimations per client and set reminders on follow-up dates. It does not process refunds or communicate with the department for you.

This article explains the Income-tax Act, 2025 (as amended by the Finance Act, 2026). It is general information, not tax advice. Confirm the position for a specific case with a qualified chartered accountant.