31.1 Deduction of provision for bad and doubtful debts for bank or FI
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Section 31(1) 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 u/s 26. Table
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31.1.1 Conditions for deduction of actual bad debts
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Section 31(2)(c) where actual bad debts relates to an assessee to which sub-section (1) applies, –
(i) Only excess bad debts is deductible 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) Bad debts to be debited to “PBDD” such amount shall be allowed only when the assessee has debited any amount of bad debt or part thereof in that tax year to the provision for bad and doubtful debts account made under that sub-section; and
(iii) Only one PBDD account to be maintained the aforesaid account shall be only one such account u/ss (1) and such account shall be related to all types of advances, including advances made by rural branches |
Example-1
a Scheduled Bank in the Tax Year 2026-27:
Step 1: Creating the Provision [Section 31(1)]
The bank has a total income of ₹100 Crores. It claims its 8.5% statutory deduction.
Provision Account Balance: ₹8.5 Crores.
The bank pays tax on the remaining ₹91.5 Crores.
Step 2: The Actual Bad Debt Event
Later that year, a major corporate client defaults on a loan of ₹10 Crores. The bank wants to write this off as an "actual" bad debt.
Step 3: Applying the 31(2)(c) Filter
The bank cannot simply deduct the full ₹10 Crores because it already got a "free" deduction of ₹8.5 Crores earlier in the year.
Actual Bad Debt: ₹10 Crores
Existing Provision Balance: ₹8.5 Crores
Allowable Extra Deduction: ₹10 Cr - ₹8.5 Cr = ₹1.5 Crores
31.2 Deduction of actual bad debts by other
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Section 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 u/s 26, subject to the following conditions: – (a) Income Conditions 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
Money Lending It represents the money lent in the ordinary course of the business of banking or money lending which is carried on by the assessee; |
31.2.1 The "Write-off" Condition
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Section 31(3)(a) For the purposes of sub-section (2), – any bad debt or part of it written off as irrecoverable shall not include any provision for bad and doubtful debt |
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You must debit your profit & loss account and clear it from your debtors' balance sheet. A mere "provision for bad debt" entry does not qualify for regular businesses. |
31.2.1.1 Deemed Write-Off for ICDS-Adjusted Income
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Section 31(3)(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 irrecoverable or of an earlier tax year as per ICDS notified u/s 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 irrecoverable in the accounts for the purposes of sub-section (2). |
Example
Year 1: The ICDS Mismatch
You are a contractor. Under ICDS III (Construction Contracts), you are required to recognize ₹5,00,000 as income based on the "percentage of completion" method.
The Books: However, under your internal accounting policy, you haven't raised the bill yet, so your Accounting Books show ₹0 income for this client.
The Tax: You follow ICDS and pay tax on the ₹5,00,000 anyway in your 2025-26 tax return.
Year 2: The Bad Debt Event
The client goes bankrupt. The ₹5,00,000 you "earned" on paper is now officially gone.
The Legal Hurdle: Usually, to claim a bad debt deduction u/s 31(2), you must show that you debited your P&L and credited the Debtor in your books. Since you never recorded the debt in your books, you have nothing to "write off."
The Solution [Section 31(3)(b)]:
Because of Section 31(3)(b), the law ignores the fact that your books are empty.
It deems the ₹5,00,000 to have been written off in your accounts.
Result: You get to claim a deduction of ₹5,00,000 in your Year 2 tax return, effectively getting back the tax you overpaid in Year 1.
31.2.2 Deficiency on final settlement of debts
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Section 31(2)(b) If the amount ultimately recovered on any such debt or part of debt is less than the difference between debt or part and [Original Debt] the amount so deducted, [Allowed as deduction] the deficiency shall be deductible in the tax year in which the ultimate recovery is made; and |
Example
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Step |
Item |
Amount |
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1 |
Total Debt owed to you |
$10,000 |
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2 |
Amount you deducted last year (Bad Debt) |
$7,000 |
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3 |
The Difference (Remaining Value) |
$3,000 |
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4 |
Final amount you actually recovered |
$1,000 |
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5 |
The Deficiency (Deductible now) |
$2,000 |
Explanation: You expected to get $3,000 back, but you only got $1,000. Because you lost an additional $2,000 that you hadn't already deducted, the law lets you deduct that final $2,000 in the current tax year.