Bad Debt Deduction and Provision for Doubtful Debts under the Income Tax Act 2025 (Section 31)

Section 31 of the Income-tax Act, 2025 allows two different deductions in business or profession income (section 26). A bad debt written off as irrecoverable in your accounts is deductible for the tax year of write-off, subject to conditions (section 31(2)). A provision for bad and doubtful debts is deductible only for banks, public financial institutions, State financial or industrial investment corporations and NBFCs, up to 8.5% or 5% of total income depending on the type (section 31(1)).

Everyone else, including a trader or a professional, gets a deduction only when the debt is actually written off, not when it is merely provided for. This guide uses the Act as amended by the Finance Act, 2026 and the Income-tax Rules, 2026, with section and rule numbers beside each point.

What does section 31 of the Income Tax Act 2025 cover?

Section 31 has three parts:

• Section 31(1): deduction for a provision for bad and doubtful debts, only for the assessees listed in the Table.
• Section 31(2): deduction for a bad debt written off as irrecoverable, open to any assessee who meets the conditions.
• Section 31(3): clarifies what counts as a write-off.

Both deductions are allowed in computing income chargeable under section 26, the head "Profits and gains of business or profession".

When can I claim a deduction for a bad debt written off?

Under section 31(2), a debt, or part of it, is deductible in the tax year in which you write it off as irrecoverable in your accounts. Two conditions apply from section 31(2)(a) and (b):

1. The debt was already part of your income, or was money lent in the ordinary course of banking or money lending. Either the amount was taken into account in computing your income of the year of write-off or an earlier tax year, or it represents money lent in a banking or money-lending business you carry on.
2. Recovery shortfall. If you later recover less than the difference between the debt (or the part) and the amount already deducted, the shortfall is deductible in the tax year of the final recovery.

A write-off needs to be recorded in your accounts. Section 31(3)(b) adds one case: if the income computation and disclosure standards notified under section 276(2) have you account for the debt in income without recording the write-off, the debt is deemed written off in the year it becomes irrecoverable.

Is a provision for doubtful debts deductible?

Only for specified assessees. Section 31(3)(a) also says a write-off does not include a provision for bad and doubtful debt. So a trader who creates a provision of 5% on debtors in the books does not get a deduction for it, and gets the deduction later when a specific debt is written off.

The Table in section 31(1) sets the cap for those who qualify:

Sl. No.	Specified assessee	Maximum deduction for the provision
1	Scheduled bank (other than a foreign bank), non-scheduled bank, or co-operative bank (other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank)	Up to 8.5% of total income of the tax year computed before this deduction and before Chapter VIII deductions, plus an additional amount up to 10% of aggregate average advances of rural branches
2	Foreign bank; public financial institution, State Financial Corporation or State Industrial Investment Corporation; non-banking financial company	Up to 5% of total income of the tax year computed before this deduction and before Chapter VIII deductions

Banks in Sl. No. 1 that are scheduled or non-scheduled banks may also claim, at their option, an additional amount above the 8.5% cap, up to the income from redemption of securities under a Central Government scheme, if that income is disclosed under the business head (section 31(1), Sl. No. 1, clause (b)).

How are the average advances of rural branches worked out?

Rule 22 of the Income-tax Rules, 2026 sets the method for the 10% add-on. The rule is worded for the rural branches of a scheduled bank (rule 22(1)), so check how it applies to a non-scheduled or co-operative bank. The steps:

1. For each rural branch, add up the advances outstanding at the end of the last day of each month of the tax year.
2. Divide that sum by the number of months taken into account.
3. Add up the results of all rural branches. That total is the aggregate average advances.

Worked example 1: provision cap for an NBFC (tax year 2026-27)

Assumptions: an NBFC (Sl. No. 2) has total income of Rs 2,40,00,000 for tax year 2026-27, computed before the section 31(1) deduction and before Chapter VIII deductions. It has made a provision of Rs 15,00,000 for bad and doubtful debts.

Step	Working	Amount (Rs)
1. Cap at 5% of total income	2,40,00,000 x 5%	12,00,000
2. Provision made	Given	15,00,000
3. Deduction allowed	Lower of step 1 and step 2	12,00,000

Worked example 2: scheduled bank with rural branches (tax year 2026-27)

Assumptions: a scheduled bank (Sl. No. 1) has total income of Rs 100 crore before the deduction and Chapter VIII. It has two rural branches. Branch A's month-end advances over 12 months add up to Rs 6 crore. Branch B's add up to Rs 18 crore. All figures in Rs crore for compactness. The bank makes a provision large enough to hit the cap.

Step	Working	Rs crore
1. Branch A average advances (rule 22(1)(b))	6 / 12	0.50
2. Branch B average advances	18 / 12	1.50
3. Aggregate average advances (rule 22(1)(c))	0.50 + 1.50	2.00
4. Cap at 8.5% of total income	100 x 8.5%	8.50
5. Rural add-on at 10%	2.00 x 10%	0.20
6. Maximum deduction	8.50 + 0.20	8.70

Worked example 3: bank bad debt written off against the provision

Section 31(2)(c) adds rules where a bank or institution with a section 31(1) provision writes off a debt. Assume the provision account has a credit balance of Rs 40,00,000 and the bank writes off Rs 55,00,000 of a loan in the tax year, debiting it to that provision account.

Step	Working	Amount (Rs)
1. Bad debt written off	Given	55,00,000
2. Credit balance in provision account	Given	40,00,000
3. Deduction under section 31(2)	Only the excess over the credit balance (31(2)(c)(i)): 55,00,000 - 40,00,000	15,00,000

The bank must also have debited the write-off to the provision account in that tax year (31(2)(c)(ii)), and it can maintain only one such account, covering all advances including rural branch advances (31(2)(c)(iii)).

What if I recover more than I expected after the deduction?

Section 38(1)(d) deems certain recoveries to be business income. Where a bad debt deduction was allowed under section 31(2) and the amount later recovered exceeds the difference between the debt and the amount allowed, the excess is taxable as business income in the tax year of recovery. Example: a Rs 1,00,000 debt is fully deducted, so the difference is nil. If Rs 30,000 comes in later, all Rs 30,000 is business income of that year. Recoveries up to the difference are not taxed again here.

Real-life example: Meena, a trader

Meena sells goods on credit and records the sale of Rs 3,00,000 to a customer as income in tax year 2025-26. In 2026-27 the customer is untraceable. Meena writes off Rs 1,00,000 in her accounts as irrecoverable. That Rs 1,00,000 is deductible in 2026-27 because the income was already counted (section 31(2)(a)). Later she recovers Rs 1,50,000 on the debt. The difference between the debt and the amount deducted is Rs 2,00,000 (3,00,000 - 1,00,000). She recovered Rs 1,50,000, so the shortfall of Rs 50,000 is deductible in the tax year of that final recovery (section 31(2)(b)).

Real-life example: Ravi, who created a provision

Ravi runs a wholesale business. At year-end he credits "provision for doubtful debts" with 5% of his debtors and debits profit. Ravi is not a bank, financial institution or NBFC, so section 31(1) does not apply to him. A provision is also excluded from a write-off under section 31(3)(a). When Ravi adds the provision back and a particular customer's dues are later written off as irrecoverable, he claims that write-off under section 31(2).

Quick reference

Question	Answer	Source
Who can deduct a provision?	Banks, PFIs, SFCs, SIICs, NBFCs as listed	31(1) Table
Cap for scheduled, non-scheduled and co-operative banks	8.5% of total income, plus 10% of rural branch average advances	31(1), Sl. No. 1
Cap for foreign banks, PFIs, SFCs, SIICs, NBFCs	5% of total income	31(1), Sl. No. 2
Who can deduct a written-off bad debt?	Any assessee meeting the conditions	31(2)
In which year?	The tax year of write-off; shortfall in the year of final recovery	31(2), 31(2)(b)
Rural branch average advances	Month-end advances, averaged per branch, then summed	Rule 22

What are the common mistakes with bad debt and provision claims?

• Claiming a provision as a bad debt. Under section 31(3)(a), a provision is not a write-off. Only the assessees in the Table get a provision deduction.
• Writing off a debt whose income was never counted. Outside banking or money lending, the amount has to have been taken into account as income in the year of write-off or earlier (section 31(2)(a)).
• Not recording the write-off. The deduction follows the write-off in your accounts, except the deemed-write-off case in section 31(3)(b).
• Computing the cap on the wrong base. The 8.5% and 5% apply to total income computed before the section 31(1) deduction and before Chapter VIII deductions.
• Forgetting the provision account rules. A bank claiming under 31(2) must debit the provision account and may deduct only the excess over its credit balance.
• Missing the shortfall on recovery. If you recover less than expected, the deficiency has its own deduction in the year of recovery.

Where is this in the Act?

• Section 31(1) and Table: provision for bad and doubtful debts
• Section 31(2): bad debt written off, including (a), (b) and (c)
• Section 31(3): what is and is not a write-off
• Section 38(1)(d): excess recovery of an allowed bad debt taxed as business income
• Section 26: the business or profession head these deductions apply to
• Section 276(2): income computation and disclosure standards
• Rule 22, Income-tax Rules, 2026: aggregate average advances of rural branches

How do CA firms keep track of bad debt write-offs across clients?

For a CA firm, the hard part is collecting the year-end evidence: which debts a client wrote off, whether the income was counted, and which clients are bank or NBFC cases with a provision account. Finexo's practice management software keeps year-end checklists and document requests per client so that these items are chased before filing. It does not compute the deduction for you.

For a worked example of another deduction-and-deposit topic under the new Act, see our guide to TDS on rent under the Income Tax Act 2025.

This article explains the Income-tax Act, 2025 (as amended by the Finance Act, 2026) and the Income-tax Rules, 2026. It is general information, not tax advice. Confirm the position for a specific case with a qualified chartered accountant.