Section 31 of the Income-tax Act, 2025 — Deduction for Bad Debts and Provision for Bad and Doubtful Debts

In plain language

What Section 31 is about

Section 31 of the Income-tax Act, 2025 (effective 1 April 2026) is the provision that lets a business or profession claim a deduction when money owed to it turns out to be irrecoverable — a bad debt — and, for banks and certain financial institutions, a deduction for a provision for bad and doubtful debts even before the debt actually goes bad. It carries forward, in consolidated form, the old Section 36(1)(vii) (bad debt written off), Section 36(1)(viia) (provision for banks/financial entities) and the qualifying conditions of Section 36(2) of the Income-tax Act, 1961.

Who it applies to

• Every assessee carrying on business or profession can claim actual bad debts written off, if the conditions below are met. A trader, manufacturer, professional, consultant — all qualify.
• Only specified financial entities can additionally claim a deduction for a mere provision (i.e., an estimate that is not yet actually written off). These are Indian scheduled and non-scheduled banks, co-operative banks (other than primary agricultural credit societies), foreign banks, public financial institutions, State Financial Corporations and non-banking financial companies (NBFCs).

Deduction for actual bad debt written off

Under Section 31(2), a bad debt (or part of it) is allowed as a deduction in the tax year in which it is written off as irrecoverable in the books, subject to these conditions:

• It must have been offered to tax earlier — the debt was taken into account in computing income of the current or an earlier year (e.g., a credit sale you already booked as income), or it represents money lent in the ordinary course of banking or money-lending business.
• It must be written off in the accounts — you cannot deduct a debt you still show as fully recoverable. A mere provision is not enough for a normal taxpayer.
• For entities that also claim a provision under 31(1), the write-off deduction is allowed only to the extent it exceeds the credit balance in the provision account, and the bad debt must be debited to that provision account. Only one consolidated provision account is allowed for all advances, including rural advances.

Provision for bad and doubtful debts (banks and financial entities)

Section 31(1) gives an extra, upfront deduction to financial entities based on a percentage cap, even where no specific debt has yet gone bad:

• Indian banks and co-operative banks: up to 8.5% of total income (computed before this deduction and before Chapter VIII deductions) plus 10% of the aggregate average advances of rural branches.
• Foreign banks, public financial institutions, State Financial Corporations and NBFCs: up to 5% of total income (computed before this deduction and Chapter VIII).

Recovery, and how it interacts with other rules

• Deficiency on recovery: if the amount finally recovered is less than the balance after the earlier deduction, the shortfall (deficiency) is deductible in the year of ultimate recovery. Conversely, a recovery of a previously deducted bad debt is taxable.
• ICDS-based write-offs: a bad debt recognised under Income Computation and Disclosure Standards, even without a separate accounting entry, can qualify as irrecoverable.
• Provision is not a bad debt: Section 31(3) clarifies that a "bad debt written off" does not include a provision for bad and doubtful debts — the two are treated distinctly.

Practical implications

For an ordinary business, the takeaway is simple: book the amount as income first, then write it off in your ledger before claiming it. You no longer have to prove the debt is "truly" irrecoverable — writing it off in the books is generally sufficient (a position settled under the old law and continued here). Banks and NBFCs get the additional percentage-based cushion, but must run a single provision account and net the write-off against it to avoid a double deduction.