Bad Debts [Sec. 31], Provision for Bad Debts [Sec. 31], Treatment

Section 31 of the Income-tax Act, 2025 deals with deduction for bad debts and provision for bad and doubtful debts, allowed while computing income under Section 26. It permits two categories of deduction: a provision-based deduction available to specified financial entities scheduled banks, co-operative banks, public financial institutions, and NBFCs subject to prescribed percentage ceilings of total income, and a write-off-based deduction for actual bad debts, available to all assessees once the debt is written off as irrecoverable in the books, subject to conditions ensuring genuine, previously-recognised business debts.

Provision for Bad Debts [Sec. 31]:

1. Deduction for Scheduled and Co-operative Banks [Sec. 31(1), Category 1]

Under Section 31(1), a scheduled bank (other than one incorporated outside India), a non-scheduled bank, or a co-operative bank (excluding primary agricultural credit societies and primary co-operative agricultural and rural development banks) may claim deduction for provision for bad and doubtful debts up to 8.5% of total income for the tax year, computed before this deduction and before Chapter VIII deductions. An additional amount, up to 10% of aggregate average advances made by rural branches, computed in the prescribed manner, is also allowed, recognising the higher credit risk inherent in rural lending operations.

2. Additional Deduction on Securities Redemption Income

For assessees falling under clauses (a) and (b) of the specified category — namely scheduled and non-scheduled banks — Section 31(1) further permits, at the assessee’s option, an additional deduction exceeding the standard 8.5% limit, restricted to the income from redemption of securities under a scheme framed by the Central Government. This benefit applies only where such redemption income has been disclosed in the return under the head “Profits and Gains of Business or Profession”, ensuring the concession aligns strictly with disclosed, government-scheme-linked securities income.

3. Deduction for Foreign Banks, Financial Institutions and NBFCs [Sec. 31(1), Category 2]

A bank incorporated outside India, a public financial institution, a State Financial Corporation, a State Industrial Investment Corporation, or a non-banking financial company (NBFC) is allowed a deduction for provision for bad and doubtful debts up to 5% of total income for the tax year, computed before this deduction and before Chapter VIII deductions. This lower ceiling, compared to the 8.5% available to domestic scheduled and co-operative banks, reflects a distinct statutory treatment for foreign banking entities and non-banking financial institutions under the Act.

Treatment and Tax Implications of Bad Debts:

A bad debt is a debt that has become irrecoverable from a customer or debtor. For income-tax purposes, its deduction is governed mainly by Section 36(1)(vii) read with Section 36(2) of the Income-tax Act, 2025. The deduction is generally available when the bad debt is written off as irrecoverable in the accounts, subject to the conditions prescribed under the Act.

1. Accounting Treatment

When a debt becomes irrecoverable, it is written off by debiting Bad Debts A/c and crediting Debtor’s A/c.

2. Tax Treatment

3. Tax Journal Entry

The accounting entry for writing off the debt remains:

Bad Debts A/c Dr.
    To Debtor’s A/c