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 – The Economic Times

https://economictimes.indiatimes.com/wealth/tax/income-tax-refund-under-new-2025-tax-act-can-be-set-off-with-tax-refund-due-under-old-1961-income-tax-act-explanatory-memorandum-clarifies/articleshow/129816477.cms

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ET OnlineAny tax refund arising under Income Tax Act, 1961 can be set off against the tax demand amount payable under Income Tax Act 2025, explanatory memorandum clarifies (AI generated representative image)

To help taxpayers understand income tax refunds better, the government in its explanatory memorandum for the amended Finance Bill, 2026, has said that any refund under Income Tax Act, 1961 can be used to offset any tax owed under Income Tax Act, 2025 and vice versa.

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For the uninitiated, Section 245 of the Income Tax Act, 1961, gave the tax department the authority to offset any tax refund without needing to consider any tax demands from previous years. This clarification confirms that this practice will aslo apply under the new Income Tax Act, 2025.

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 explanation makes it clear that the old and new Acts can work together seamlessly for this particular situation.

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.