Direct and Indirect Taxation · Self-Assessment and Intimation

Adjustments Permitted and Refunds on Processing of a Return

Updated 10 October 2026 · Fact-checked

When the department processes your return, it recomputes income and tax from the return itself. It may make only the adjustments listed in the Act, such as arithmetical errors and incorrect claims apparent from the return. Where an adjustment is prejudicial to you, it must first give notice and consider your reply. It then grants a refund or issues an intimation that works as a demand notice.

Understand Adjustments Permitted and Refunds on Processing

Processing is a quick, computer-based check of your return. It is not scrutiny. The department looks only at what is in the return and a few linked records. It does not call for books or evidence.

Because processing is limited, the law allows only the specific adjustments listed in the Act. These are not open-ended. The main ones you must know are: (1) an arithmetical error in the return; (2) an incorrect claim, if apparent from any information in the return; (3) disallowance of a loss claimed where the return was filed after the due date and the Act bars the claim in that case; (4) disallowance of expenditure, or addition of income, based on information in the audit report that was not reflected in the computation; (5) disallowance of specified deductions that are allowed only if the return is filed by the due date, where it was filed late; and (6) addition of income shown in Form 26AS, or in TDS statements and certificates, but not included in the return.

The statutory list contains further clauses beyond these six. Examples are disallowance of a deduction in respect of contributions to specified funds, where the Act's conditions are not met, and mismatch of tax credit. Read the Act's list in your study material and treat the six above as the main ones, not a closed list of exactly six.

Apparent means visible on the face of the return, without debate. A claim of a deduction that the return's own figures show to be above the allowed limit is apparent. A claim that needs a legal argument or outside evidence is not. Disputed questions belong to scrutiny, not processing.

There is a safeguard. Where an adjustment is prejudicial to you (it increases your income or reduces your loss), the department must first send you an intimation of the proposed adjustment, in writing or electronically. It must consider any reply you give. If you do not reply within 30 days of the issue of that intimation, it may go ahead. No prior intimation is needed for an adjustment that has no adverse effect on you.

After the adjustments, tax is recomputed on the adjusted total income. Credit is given for advance tax, TDS, TCS, self-assessment tax and relief. If you paid more, a refund is granted. If you paid less, an intimation is sent, and it is treated as a notice of demand for the balance with interest. The provisions are in the Income-tax Act, 2025. Learn the structure and the wording, not just section numbers.

Key rules to remember

Permitted adjustments (main ones to remember): Arithmetical error | Incorrect claim apparent from return | Loss disallowed if return late | Audit-report items not reflected | Specified deductions disallowed if return late | Income per Form 26AS/TDS data not included; Only adjustments listed in the Act are allowed at processing. The Act has further clauses, such as specified fund contributions and tax credit mismatch. Anything outside the statutory list needs scrutiny.
Safeguard before adjustment: Adjustment prejudicial to assessee (increases income or reduces loss) → intimation of proposed adjustment → consider reply → if no reply within 30 days of issue, proceed; A prejudicial adjustment without prior intimation is not valid. No intimation is needed where the adjustment does not adversely affect the assessee.
Net result of processing: Tax on adjusted total income (with cess, interest, fee) − (advance tax + TDS + TCS + self-assessment tax + relief) = demand if positive, refund if negative; Apply the credits to the adjusted figures, not the figures in your return.
Effect of the intimation: Tax payable: intimation = notice of demand | Refund due: refund granted to you; A refund may be set off against an outstanding demand, after you are informed.

How to solve Adjustments Permitted and Refunds on Processing questions

Use this order for any question on adjustments, refund or demand after processing.

1Write down the figures in the return: total income, tax computed, and prepaid taxes.
2Test each point in the question against the permitted adjustments in the Act. If it needs evidence or a legal argument, it is not an adjustment at processing.
3For each valid adjustment, state the reason in a few words, for example arithmetical error or income in Form 26AS omitted.
4Mention the safeguard: for a prejudicial adjustment, written or electronic intimation first, reply considered, 30 days to respond. No intimation is needed if the adjustment is not adverse to the assessee.
5Recompute total income, then tax at the given rate, then add cess and surcharge if the question gives them.
6Deduct all prepaid taxes to get the balance. Add interest or fee only if the question supplies the data.
7Conclude: a positive balance gives a demand (the intimation is the demand notice). A negative balance gives a refund, subject to set-off against any outstanding demand.

Quickest way: Adjusted income to refund or demand in four lines

When to use it: For numerical questions with a given tax rate and a list of prepaid taxes.

Line 1: Returned income ± adjustments = adjusted income.
Line 2: Adjusted income × rate, plus cess = tax liability.
Line 3: Total of advance tax, TDS and other credits.
Line 4: Line 2 − Line 3. Positive means demand, negative means refund. Write the words and the amount.

Common mistakes in Adjustments Permitted and Refunds on Processing

Treating any wrong claim as adjustable at processing.
Students ignore the word apparent.
Fix: Allow adjustment only when the error is visible from the return's own information. Doubtful or evidence-based claims go to scrutiny.
Forgetting the prior intimation and the chance to reply for a prejudicial adjustment.
Students focus on the computation and skip the procedure.
Fix: Write one line: for an adjustment that increases income or reduces loss, intimation of proposed adjustment, reply considered, and 30 days to respond.
Computing refund on the income in the return instead of the adjusted income.
The return figures are on the page and are used by habit.
Fix: Adjust the income first, then compute tax, then deduct prepaid taxes.
Disallowing a deduction for late filing when the deduction does not depend on the due date, or treating the list of adjustments as limited to exactly six.
Students assume late filing kills every deduction, and memorise only six points.
Fix: Disallow only the deductions that the Act makes conditional on filing by the due date, and losses where the late return bars their claim. Remember that the statutory list has other clauses too, such as specified fund contributions and tax credit mismatch.
Saying a separate demand notice must be issued after the intimation.
Students mix this with other proceedings.
Fix: State that the intimation itself is treated as the notice of demand when tax is payable.
Ignoring outstanding demand when stating the refund.
The question mentions an old demand in one line and it is overlooked.
Fix: Set off the refund against the old demand and state the net amount, noting that you must be informed of the set-off.

Worked examples

Example 1

A firm filed its return showing total income of ₹6,00,000. At processing, the department finds (a) an addition error that understated business income by ₹40,000 and (b) interest of ₹20,000 appearing in Form 26AS that was left out of the return. Tax rate is 30% plus 4% cess. Advance tax paid is ₹1,50,000 and TDS is ₹30,000. Ignore interest and fee. Find the demand or refund.

Show the solution

Adjustment (a) is an arithmetical error. Adjustment (b) is income in Form 26AS not included in the return. Both are permitted adjustments.
Both adjustments increase the firm's income, so they are prejudicial to it. The firm must first be sent an intimation of both proposed adjustments and its reply considered. If there is no reply within 30 days of issue, the department may proceed.
Adjusted income = 6,00,000 + 40,000 + 20,000 = ₹6,60,000.
Tax at 30% = ₹1,98,000. Cess at 4% = ₹7,920. Total tax = ₹2,05,920.
Prepaid taxes = 1,50,000 + 30,000 = ₹1,80,000.
Balance = 2,05,920 − 1,80,000 = ₹25,920 payable.

Answer: Demand of ₹25,920 (before any interest). The intimation sent after processing is treated as the notice of demand.

Example 2

A firm's return shows total income of ₹4,00,000. Tax at 30% plus 4% cess is paid through TDS of ₹1,40,000. There is no adjustment. The firm has an outstanding demand of ₹5,000 for an earlier year. Find the refund and what happens to it.

Show the solution

No adjustment is needed, so total income stays ₹4,00,000. No intimation of proposed adjustment is required.
Tax at 30% = ₹1,20,000. Cess at 4% = ₹4,800. Total tax = ₹1,24,800.
TDS credit = ₹1,40,000.
Excess paid = 1,40,000 − 1,24,800 = ₹15,200. This is the refund due.
The outstanding demand of ₹5,000 can be set off against the refund, after the firm is informed.
Net refund = 15,200 − 5,000 = ₹10,200.

Answer: Refund of ₹15,200 is determined. After set-off of the ₹5,000 old demand, ₹10,200 is paid to the firm (before any interest on refund).

Exam tips

In theory questions, list the main adjustments, then add the intimation and 30-day safeguard for prejudicial adjustments. This pattern earns most of the marks.
Always state why a claim is or is not apparent from the return. Examiners reward the reason, not just the verdict.
In numericals, show adjusted income, tax, credits and net result as separate lines so you get step marks even if one figure is wrong.
MCQs often test who can adjust (processing, not scrutiny) and what the intimation means (a demand notice). Read the options for those words.
Use the tax rate, cess and surcharge given in the question. Do not add interest unless the data is supplied.

Practice questions from Self-Assessment and Intimation

Adjustments Permitted and Refunds on Processing: frequently asked questions

What is an incorrect claim apparent from the return?

It is a claim whose error is visible from the information in the return itself, with no need for evidence or a legal argument. An example is a deduction claimed above the limit that the return's own figures show. Such a claim can be adjusted at processing.

Is the assessee heard before an adjustment is made?

Yes, where the adjustment is prejudicial to you, meaning it increases your income or reduces your loss. The department must first send an intimation of the proposed adjustment in writing or electronically, and it must consider your reply. If you do not reply within 30 days of the issue of the intimation, it may make the adjustment. No intimation is needed for an adjustment that does not adversely affect you.

How is the refund decided on processing?

Tax is computed on the adjusted total income. Advance tax, TDS, TCS, self-assessment tax and relief are deducted. If the credits exceed the tax, the excess is refunded. A refund can be set off against any outstanding demand after you are informed.

Is a separate demand notice sent after the intimation?

No. When tax is payable, the intimation itself is treated as the notice of demand. You then pay the amount, or use the available remedies if you disagree.