Chapter XX - Refunds
Section 438
Section 438: set off and withholding of refunds in certain cases
Section 438 gives tax authorities two related powers over a refund that is otherwise due: first, to set it off against other tax the same person owes instead of paying it out; and second, to withhold a refund for a limited period where assessment or reassessment proceedings are still pending.
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Need advice on Section 438?
This article is for general information. Refer to the Income-tax Act, 2025 as amended by the Finance Act, 2026 and the Taxation and Other Laws (Amendment) Act, 2026 for the official provisions. If you need professional advice for your situation, contact Bizeneed.
Statutory text
Bare law
(1) Where a refund becomes due or is found to be due to any person under this Act, the Assessing Officer or Commissioner or Principal Commissioner or Chief Commissioner or Principal Chief Commissioner, as the case may be, may in lieu of payment of the refund, set off the amount to be refunded or any part of that amount, against the sum, if any, remaining payable under the Income-tax Act, 1961 (43 of 1961), or this Act by such person.
(2) Any action under sub-section (1) shall be taken after giving an intimation in writing to such person of the action proposed to be taken.
(3) Where,— (a) a part of the refund is set off under sub-section (1); or (b) no such amount as referred to in clause (a) is set off, and refund becomes due to a person, and the Assessing Officer, having regard to the fact that proceedings for assessment or reassessment are pending in the case of such person, may, for reasons to be recorded in writing and with the previous approval of the Principal Commissioner or the Commissioner, withhold the refund up to sixty days from the date on which such assessment or reassessment is made.
Introduction
When a refund becomes due, the named tax authorities may set it off against a sum still payable by the same person under the 2025 Act or the 1961 Act. Written intimation of proposed set-off is required.
A remaining refund may be withheld during a pending assessment or reassessment only with recorded reasons, previous approval of the Principal Commissioner or Commissioner and the statutory time limit.
Key takeaways
Set-off against dues
The refundable amount or part of it may be applied against the same person’s outstanding amount under either named Act.
Advance written intimation
The authority must give written intimation before acting under subsection (1).
Withholding safeguards
A pending assessment or reassessment, recorded reasons and previous approval are required to withhold a remaining refund.
Withholding has a limit
The maximum stated period is up to sixty days from the date the assessment or reassessment is made.
Setting off a refund against other dues
Sub-section (1): where a refund becomes due or is found due to any person, the Assessing Officer, Commissioner, Principal Commissioner, Chief Commissioner or Principal Chief Commissioner may, instead of paying out the refund, set off the refund amount (or any part of it) against any sum remaining payable by that person under the Income-tax Act, 1961 or under this Act.
Withholding a refund during pending assessment or reassessment
Sub-section (3) applies where either (a) only part of the refund has been set off under sub-section (1), or (b) no amount has been set off at all, and a refund becomes due to the person.
In that situation, if assessment or reassessment proceedings are pending in the person's case, the Assessing Officer may withhold the refund - for reasons recorded in writing, and with the prior approval of the Principal Commissioner or Commissioner - for up to 60 days from the date the assessment or reassessment is made.
Written intimation before set-off
Sub-section (2) requires written intimation of the proposed set-off before the authority acts under sub-section (1). The person can compare the named outstanding amount with the refund in that notice.
Step-by-step flow for set off and withholding under Section 438
- 1
Has a refund become due, or been found due, to the person under the Act?
- No: Section 438 does not apply.
- Yes: Go to the next step.
- 2
Does any sum remain payable by the person under the Income-tax Act, 1961 or this Act?
- No: Nothing to set off; go to step 4.
- Yes: Go to the next step.
- 3
Set off after written intimation
The Assessing Officer, Commissioner, Principal Commissioner, Chief Commissioner or Principal Chief Commissioner, as the case may be, may set off all or part of the refund against that sum, instead of paying it. The action is taken only after a written intimation of the proposed action (Section 438(1) and (2)).
- 4
Is an assessment or reassessment pending in the person's case?
- No: Section 438(3) gives no ground to withhold the refund or the balance after set off.
- Yes: Go to the next step.
- 5
Withholding conditions
The Assessing Officer may withhold the refund only for reasons recorded in writing and with the previous approval of the Principal Commissioner or Commissioner. The withholding can last up to sixty days from the date on which the assessment or reassessment is made (Section 438(3)).
Practical checklist
Do
- Review the proposed set-off intimation and identify the outstanding amount relied on.
- If a refund is withheld, ask for the recorded basis, approval and relevant assessment dates.
Avoid
- Do not treat set-off and temporary withholding as the same statutory action.
Illustrative example
Worked example: partial set off and then withholding
Hypothetical facts (illustration only, not a real taxpayer): Ms. Gupta is due an assumed refund of ₹90,000 for the tax year 2026-27. An assumed ₹35,000 remains payable by her under the Income-tax Act, 1961 for an earlier year. An assessment in her case is pending and is completed on 15 March 2028.
Intimation
The Assessing Officer first sends her a written intimation of the proposed set off (Section 438(2)).
Set off
₹90,000 − ₹35,000 = ₹55,000 balance refund.
Withholding
Because an assessment is pending, the Assessing Officer records reasons in writing and obtains the previous approval of the Principal Commissioner or Commissioner to withhold the ₹55,000.
Limit
Withholding is allowed up to sixty days from 15 March 2028. Counting from the next day, sixty days end on 14 May 2028.
Outcome
- ₹35,000 is set off against the 1961 Act dues and the balance of ₹55,000 may be withheld up to 14 May 2028.
- Without written reasons and the required approval, Section 438(3) gives no power to withhold.
Frequently asked questions
Can the tax department adjust my refund against tax I still owe?
Yes - section 438(1) lets the Assessing Officer or a senior authority set off a due refund (in full or in part) against any sum you still owe under the Income-tax Act, 1961 or the Income-tax Act, 2025, after giving you written intimation of the proposed set-off.
For how long can a refund be withheld?
Under section 438(3), where assessment or reassessment proceedings are pending, the Assessing Officer may withhold the refund for up to 60 days from the date the assessment or reassessment is made, and must record reasons in writing with the prior approval of the Principal Commissioner or Commissioner.
Must I be informed before my refund is set off against dues?
Yes. Section 438(2) requires any set off under Section 438(1) to be made after giving you an intimation in writing of the action proposed to be taken.
Need help applying this provision to your situation?
Get help responding to a refund set-off or withholding noticeLast updated 9 October 2026