As ITR filing for AY 2025-26 picks up pace, reports suggest the government may delay issuing tax refunds until past assessments are cleared under Section 245. Experts warn this move could hurt honest and salaried taxpayers who rely on timely refunds for financial planning and liquidity.

ITR Filing AY 2025-26: Over 1.05 crore income tax returns (ITRs) have been filed so far in the ongoing assessment year 2025-26. Of these returns, around 95% returns are verified, data updated till July 8 shows. The tax department has so far processed about 63 lakh ITRs. The filing of returns by taxpayers and processing by the tax department is expected to gather pace in the coming weeks since the government is yet to release necessary online and offline utilities for other ITR forms like ITR 2, 3, 5, 6 and 7. Also, there would be many tax filers who would be thinking of filing returns in August or September, as the government has already extended the deadline by 46 days until September 15.

Amidst all this, a new concern has emerged among taxpayers. Reports suggest that this time the tax department is doing additional scrutiny in ITR assessment and processing, leading to delayed refunds. The reports also claim that income tax refunds are not being issued in cases where assessments of previous years are not completed.

Sandeep Bhalla of Dhruva Advisors explains, “Section 245 would likely apply to specific taxpayers — such as those under scrutiny, with past mismatches, pending tax demands, or incomplete assessments — with the goal of stopping refund claims where likely tax demands are expected.”

They say refunds should be withheld only if old assessments or tax demands are pending — not as a blanket policy for all taxpayers.

What does Section 245 say?
Section 245 of the Income Tax Act empowers the income tax department to assess old tax liabilities of taxpayers before issuing refunds to them and adjust the refund against any dues.

But tax experts say the widespread and unregulated use of this provision could prove to be detrimental for honest taxpayers.

Delay in refunds is unfair to honest taxpayers, says expert Dinkar Sharma, Company Secretary and Partner, Jotwani Associates, elaborates on the matter, “Taxpayers who file returns timely, report all income, and respond to notices may find their refunds delayed because of administrative inefficiencies. This may lead them to feel punitive, particularly when there are no outstanding issues or pending notices against them."

He believes that taxpayers who follow every rule should not be made victims of system delays.

‘Holding back refunds is not practical, it will tire out taxpayers’

Sharma further says, “The risk is that honest taxpayers may become disillusioned, reducing their incentive to be timely and compliant in the future. Over time, this erodes the voluntary compliance culture that India has been carefully cultivating through tech-based reforms."

If there is no timeliness and transparency in the tax system, people will lose faith in the system.

Technical problems and backlogs are also reasons
Technical changes have taken place after the implementation of the Faceless Assessment Scheme, but there are still many glitches in AI and data systems (such as AIS and TIS).

Sharma says, “New reporting tools like the Annual Information Statement (AIS) and Taxpayer Information Summary (TIS) often have mismatches that flag even small refund cases for review. Resolution of these flags requires manual intervention in many cases - again delaying refunds."

This means that even a small error can result in a refund being stopped.

AI can be a solution, but it is still incomplete, feel experts
The tax department has adopted AI-based systems like Project Insight, but experts believe that this technology is not yet fully mature.

Sharma explains, “Many refund cases are incorrectly flagged due to false positives, requiring human override. AI tools are not yet mature enough to distinguish between genuine salaried taxpayers and suspicious refund claims.”

What could be the solution?

Experts have also given some concrete suggestions:

• Low-risk taxpayers should be identified and refunds should be issued to them quickly.
• There should be transparent and clear communication in case of refund delay.
• Deploy additional staff or taskforce for pending assessments.
• Improve the refund process through AI based automation.
• Provide partial refunds - hold only the disputed amount instead of withholding the entire refund.

Reward or punishment for honesty?
Refund is a taxpayer’s right, not a favor. If the government wants people to pay taxes honestly and on time, it is equally important to refund them on time.

As Sharma clearly stated, “A trustworthy and transparent tax administration is the cornerstone of a compliant society.”