Deduction for bad debt and provision for bad and doubtful debt
[As per the Income Tax Act, 2025 (this Act) w.e.f. 1st April, 2026.]
Section 31(1) of Income Tax Act 2025
31(1) The amount mentioned in column C of the Table below, in respect of any provision for bad and doubtful debts made by the assessee specified in column B thereof, shall be allowed as a deduction in computation of income chargeable under section 26.
TABLE
| Sl No. | Specified assessee | Amount of deduction |
|---|---|---|
| A | B | C |
| 1. | (a) A scheduled bank, other than a bank incorporated by or under the laws of a country outside India; or (b) a non-scheduled bank; or (c) a co-operative bank, other than— (i) a primary agricultural credit society; or (ii) a primary co-operative agricultural and rural development bank. | (a) not more than 8.5% of the total income of the tax year computed before making any deduction under this clause and Chapter VIII, and an additional amount up to 10% of the aggregate average advances made by rural branches computed in the manner as prescribed; (b) for an assessee mentioned in clauses (a) and (b) of column B, at its option, an additional amount in excess of clause (a) of this column but not more than the income from redemption of securities as per a scheme framed by the Central Government, when such income has been disclosed in the return of income under the head “Profits and gains of business or profession”. |
| 2. | (a) A bank incorporated by or under the laws of a country outside India; or (b) a public financial institution or a State Financial Corporation or a State Industrial Investment Corporation; or (c) a non-banking financial company. | Not more than 5% of the total income of a tax year computed before making any deduction under this clause and Chapter VIII. |
Section 31(2) of Income Tax Act 2025
31(2) Any amount of bad debt, or part of it, in the tax year in which such amount is written off as irrecoverable in the accounts of the assessee, shall be allowed as deduction in computation of income chargeable under section 26, subject to the following conditions:––
- (a) it has been taken into account in computing the income of the assessee of the tax year in which it is written off, or any earlier tax year, or represents the money lent in the ordinary course of the business of banking or money lending which is carried on by the assessee;
- (b) if the amount ultimately recovered on any such debt or part of debt is less than the difference between the debt or part and the amount so deducted, the deficiency shall be deductible in the tax year in which the ultimate recovery is made;
- (c) where it relates to an assessee to which sub-section (1) applies,––
- (i) only that amount which exceeds the credit balance in the provision for bad and doubtful debts account made under that sub-section shall be allowed as deduction;
- (ii) it shall be allowed only when the assessee has debited such amount in that tax year to the provision for bad and doubtful debts account made under that sub-section; and
- (d) the account referred to in clause (c) shall be only one such account under sub-section (1) and such account shall be related to all types of advances, including advances made by rural branches.
Section 31(3) of Income Tax Act 2025
31(3) For the purposes of this sub-section (2),––
- (a) any bad debt or part of it written off as irrecoverable shall not include any provision for bad and doubtful debt;
- (b) any amount of bad debt or part of it, which has been taken into account in computing the income of the assessee of the tax year in which the amount of bad debt or part of it becomes irrevocable or of an earlier tax year, as per income computation and disclosure standards notified under section 276(2) without recording it in the accounts, shall be allowed as a deduction in computing the income of the assessee of the tax year in which it becomes irrecoverable and such bad debt or part of it shall be deemed to be written off as irrevocable in the accounts for the purposes of sub-section (2).
FAQs on Section 31 of Income-tax Act 2025
1. What does Section 31 cover?
Section 31 allows for deductions of bad debts actually written off and provisions for doubtful debts under specific conditions and for specific types of assessees.
2. Is this deduction available to all businesses?
No. Provision-based deductions are available only to specified financial institutions like banks, co-operative banks, NBFCs, and financial corporations. All assessees can claim actual bad debts written off if conditions are met.
3. What is the deduction allowed for scheduled banks and co-operative banks?
They may claim:
- Up to 8.5% of total income, and
- An additional 10% of average rural advances,
subject to conditions.
4. Can foreign banks claim such deductions?
Yes, foreign banks, public financial institutions, and NBFCs can claim up to 5% of total income before Chapter VIII deductions.
5. Is the provision deduction automatic?
No. It must be made in accordance with prescribed rules, and the assessee must maintain a single consolidated provision account.
6. When is a bad debt deductible?
If:
- It is written off in the accounts, and
- It was previously included in taxable income or arose from regular banking/money-lending activities.
7. Can you claim both actual bad debt and provision deductions?
Yes, but actual bad debts can be deducted only to the extent they exceed the provision already claimed.
8. What if a provisioned bad debt is actually written off later?
It must be debited from the same provision account used earlier. Double deduction is not allowed.
9. What happens if a bad debt is partially recovered later?
The shortfall between expected recovery and actual recovery can be claimed as a deduction in the year of actual recovery.
10. Can a bad debt be claimed without recording it in the books?
Yes, as per ICDS (Income Computation and Disclosure Standards) under Section 276(2), such bad debts shall be deemed written off for deduction purposes if conditions are met.
11. Are separate provision accounts allowed for different advances?
No. Only one consolidated provision account for all types of advances, including rural advances, is allowed.
Section 31 strikes a balance between protecting financial institutions from non-performing assets and ensuring deductions are justified and not duplicated. It has strict requirements on bookkeeping and proportionate limits based on income and advances, making it essential for qualifying assessees to plan and account carefully.
