Section 31 Income Tax Act 2025: When Are Bad Debts and Doubtful Debt Provisions Deductible?

Section 31 provides deductions for bad debts actually written off and, for specified banking and financial entities, qualifying provisions for bad and doubtful debts.

Current law: The Income-tax Act, 2025 applies from 1 April 2026, subject to its transitional provisions. This guide addresses Section 31 as amended by the Finance Act, 2026. For earlier tax periods, examine the applicable provisions of the Income-tax Act, 1961.

What does Section 31 provide?

Section 31 governs deductions in computing business or professional income under Section 26. It separates two situations: a statutory deduction for provisions created by specified banks and financial entities under sub-section (1), and a deduction for an eligible bad debt actually written off as irrecoverable under sub-section (2).

An ordinary business cannot deduct a general provision merely because recovery appears doubtful. It must satisfy the conditions governing an actual write-off, subject to the special rule for debts recognised under notified income computation and disclosure standards.

Which entities can claim a deduction for provisions?

Eligible assessee	Maximum deduction
Indian scheduled banks, non-scheduled banks and eligible co-operative banks, excluding specified agricultural credit and rural development societies	Up to 8.5% of qualifying total income, plus up to 10% of prescribed aggregate average rural-branch advances
Foreign banks, public financial institutions, State Financial Corporations, State Industrial Investment Corporations and non-banking financial companies	Up to 5% of qualifying total income

For these percentages, total income is computed before the deduction under the relevant clause and Chapter VIII. For eligible scheduled and non-scheduled banks, Section 31(1) also provides an optional additional deduction, subject to the specified Central Government securities-redemption scheme and statutory conditions.

When is a bad debt write-off deductible?

Under Section 31(2), an eligible bad debt or part of a debt written off as irrecoverable in the assessee's accounts during the tax year is deductible if it was previously taken into account in computing taxable income, or represents money lent in the ordinary course of a banking or money-lending business carried on by the assessee.

If the final recovery is less than the amount remaining after an earlier deduction, the qualifying deficiency may be deductible in the year of ultimate recovery. For an entity claiming the provision deduction under sub-section (1), the deduction for an actual write-off is limited to the excess over the credit balance in its bad-debt provision account, and the relevant amount must be debited to that account. The account must cover all advances, including rural-branch advances.

Important distinction: Section 31(3) expressly excludes a mere provision for bad and doubtful debt from the meaning of a debt written off as irrecoverable for the purposes of Section 31(2). A separate deemed write-off rule applies to qualifying amounts recognised under notified income computation and disclosure standards under Section 276(2).

Relevant statutory terms and concepts

Bad debt: A receivable or qualifying loan amount treated as irrecoverable and written off, subject to Section 31(2).

Provision for bad and doubtful debts: An accounting allowance for expected non-recovery; deduction is available only where Section 31 expressly permits it.

Tax year: The period defined in Section 3 of the Income-tax Act, 2025, ordinarily the financial year beginning on 1 April.

Aggregate average advances: Rural-branch advances calculated in the prescribed manner for the special bank deduction under Section 31(1).

Non-banking financial company: An entity falling within the applicable statutory definition and eligibility conditions; its classification should be verified before claiming the special deduction.

Practical illustrations

Example 1: Trade receivable written off

A trader has previously recognised a taxable sale of Rs. 2,00,000. If Rs. 50,000 becomes irrecoverable and is properly written off in the accounts, the Rs. 50,000 may qualify for deduction under Section 31(2), subject to its conditions.

Example 2: General doubtful-debt reserve

A non-financial trading company creates a Rs. 1,00,000 reserve for possible customer defaults but does not write off an identified debt. The reserve does not by itself qualify as an actual bad-debt write-off under Section 31(2).

Example 3: Eligible bank provision

An eligible bank computes its qualifying total income and, where applicable, prescribed rural-branch advances. Its allowable provision deduction is subject to the relevant percentage ceilings and actual provision created; the ceiling is not an automatic deduction.

Frequently asked questions

Can every business deduct a provision for doubtful debts?

No. The special provision deduction under Section 31(1) is restricted to specified entities. Other businesses ordinarily need an eligible write-off under Section 31(2).

Is a bad debt deductible without a write-off?

Ordinarily a write-off is required. Section 31(3)(b) contains a specific deemed write-off treatment for qualifying debts recognised under notified income computation and disclosure standards.

What is the maximum deduction for an NBFC?

For a qualifying non-banking financial company, the provision deduction under Section 31(1) is limited to 5% of qualifying total income, subject to the statutory conditions.

Does Section 31 of the 2025 Act cover repairs to machinery?

No. That was the subject of Section 31 of the Income-tax Act, 1961. Section 31 of the 2025 Act concerns bad debts and doubtful-debt provisions.

Official statutory references

Income-tax Act 2025 - official amended text Income Tax Department resources

Last reviewed: 10 November 2026. This article is general legal information; verify the applicable statutory text, rules and facts before filing a return or making a claim.