The Reserve Bank of India (RBI) is set to transfer back Rs.1,274.21 crore to Telangana with the union finance ministry advising it to reverse the deductions made from the state's principal account as "it was not in consonance with the principle of cooperative federalism".
The deductions were made in response to an income tax notice.
The RBI was also advised to keep a note that money from the consolidated fund of any state shall be transferred/withdrawn only after following the constitutional and legal requirements, an official release said.
The deduction was made in June this year towards income tax liability of Andhra Pradesh Beverages Corporation Limited.
Telangana had claimed that the money was transferred "illegally" and without any notice to the income tax department.
Union Urban Development Minister M. Venkaiah Naidu had met Finance Minister Arun Jaitley on Sunday and sought his intervention.
In June, a delegation from the state government had sought Jaitley's intervention to credit back to the state account.
The income tax department had issued notice to Andhra Pradesh Beverages Corporation in the then united Andhra Pradesh, seeking tax dues worth Rs.2,900 crore.
The department, earlier this year, moved to attach depots of the corporation to recover the dues. The Hyderabad High Court granted a stay on the attachment notice on the basis of a petition filed by the state.
The Telangana government had challenged the notice on the ground that division of the corporations' assets and liabilities between the two states was still not completed.
Telangana had also argued that the state government is not an income tax assesee.
The state delegation had told Jaitley that even if recovery has to be made, it should be from both the states.