Why did they release all the occupied land (i.e. Arunachal) in favor of India?
After a very successful invasion in ’62, India received offers of support from the USA, the UK and the USSR. Mao appears to have made a judgement that the region was not worth the bloodshed that would be required to defend it from an India supported by the other major powers. He had achieved his strategic aim of demonstrating the superiority of the PLA over the Indian Army, so he withdrew.
However, while China recognises a de facto line of control, it doesn't recognise the legality of the current de facto border. The official position is that the only justification for India to occupy the region is a treaty signed between the British and Tibet, and China doesn't recognise the right of Tibet to form a treaty.
To recognise that India has a right to the region would be implicitly recognise that Tibet was an independent state, and this is anathema to the PRC government