Section 31 of the Income-tax Act, 2025 allows a provision for bad and doubtful debts to specified lenders — 8.5% of total income plus 10% of rural branch advances for banks, and 5% for foreign banks, financial institutions and NBFCs — and allows actual write-offs.
What section 31 does
Section 31 covers two distinct deductions that are often confused: a provision for bad and doubtful debts, available only to specified lenders, and an actual bad debt written off, available to any assessee meeting the conditions.
The provision limb in sub-section (1) operates through a table. A scheduled bank (other than one incorporated abroad), a non-scheduled bank, or a co-operative bank — excluding a primary agricultural credit society and a primary co-operative agricultural and rural development bank — may deduct up to 8.5% of total income computed before this deduction and Chapter VIII, plus up to 10% of the aggregate average advances made by rural branches.
For a bank incorporated outside India, a public financial institution, State Financial Corporation or State Industrial Investment Corporation, or a non-banking financial company, the limit is 5% of total income computed before this deduction and Chapter VIII.
The Income-tax Act, 2025 takes effect from 1 April 2026 and applies from tax year 2026-27. The Income-tax Act, 1961 continues to govern every year up to 31 March 2026, including assessments, appeals and penalties for those years, because of the repeal and savings provision in section 536. Figures quoted here are the amounts written into the Act as enacted (with the Gazette corrigenda of 3 September 2025); the annual Finance Act can change rates and thresholds.
Old Act and new Act, side by side
The table below shows what the Income-tax Act, 1961 did and where the same ground is covered in the Income-tax Act, 2025.
| Income-tax Act, 1961 | What it did | Income-tax Act, 2025 |
|---|---|---|
| 36(1)(viia) | Provision for bad and doubtful debts | 31(1) |
| 36(1)(viia)(a) | 8.5% plus 10% of rural advances for banks | 31(1) — Table serial 1 |
| 36(1)(viia)(b) to (d) | 5% for foreign banks, PFIs and NBFCs | 31(1) — Table serial 2 |
| 36(1)(vii) | Bad debt written off as irrecoverable | 31(2) |
| 36(2) | Conditions for the write-off | 31(2)(a) onwards |
| 41(4) | Recovery of a bad debt allowed earlier | 38(1)(d) |
Section 31 sub-section by sub-section
Read this alongside the bare text — each heading below is a sub-section of the section as enacted.
Sub-section (1) — the provision, and who may claim it
The amount in column C of the table is allowed as a deduction for a provision for bad and doubtful debts made by the assessee in column B. This deduction is not available to ordinary businesses — only to the specified categories of lender. A trading company's provision for doubtful receivables is not deductible under this limb.
Serial 1 — banks and co-operative banks
A scheduled bank other than one incorporated under the laws of a country outside India, a non-scheduled bank, or a co-operative bank — excluding a primary agricultural credit society and a primary co-operative agricultural and rural development bank — may deduct: (a) not more than 8.5% of total income computed before this deduction and before Chapter VIII, and an additional amount up to 10% of the aggregate average advances made by rural branches, computed as prescribed.
Serial 1(b) — the securities redemption option
A scheduled or non-scheduled bank may, at its option, claim an additional amount in excess of clause (a) but not more than the income from redemption of securities under a scheme framed by the Central Government, where that income has been disclosed in the return under the head Profits and gains of business or profession.
Serial 2 — foreign banks, financial institutions and NBFCs
A bank incorporated outside India, a public financial institution, State Financial Corporation or State Industrial Investment Corporation, or a non-banking financial company may deduct not more than 5% of total income computed before this deduction and before Chapter VIII.
Sub-section (2) — the actual bad debt
Any amount of bad debt, or part of it, in the tax year in which it is written off as irrecoverable in the accounts, is deductible, subject to conditions — principally that it (a) has been taken into account in computing income of that year or an earlier year, or represents money lent in the ordinary course of a banking or money-lending business. Writing off a debt that was never offered to tax, and did not arise from lending, gets no deduction.
The claw-back on recovery
If a bad debt allowed under sub-section (2) is later recovered, the excess over the difference between the debt and the amount allowed is taxed under section 38(1)(d). And a lender claiming both the provision under sub-section (1) and a write-off under sub-section (2) must read the interaction between them in the remaining sub-sections.
Worked example
A scheduled bank for tax year 2026-27.
| Step | Working | Amount |
|---|---|---|
| Total income before this deduction and Chapter VIII | — | ₹400,00,00,000 |
| 8.5% limb | 8.5% × ₹400,00,00,000 | ₹34,00,00,000 |
| Aggregate average advances by rural branches | As prescribed | ₹180,00,00,000 |
| 10% limb on rural advances | 10% × ₹180,00,00,000 | ₹18,00,00,000 |
| Maximum provision deductible | Serial 1(a) | ₹52,00,00,000 |
Contrast an NBFC with the same total income: serial 2 limits it to 5% = ₹20,00,00,000, with no rural advances addition. And a manufacturing company with doubtful trade receivables gets nothing under sub-section (1) — its only route is an actual write-off under sub-section (2).
Note that the base is total income computed before this deduction and before Chapter VIII, so the computation is circular unless done in that order.
Compliance checklist and due dates
- Confirm the assessee is within the specified categories before claiming any provision; ordinary businesses cannot.
- Compute the base as total income before this deduction and before Chapter VIII.
- For banks, compute the rural branch advances limb in the prescribed manner and keep the working.
- For an actual write-off, ensure the debt was taken into account in computing income earlier, or represents money lent in the ordinary course of banking or money-lending.
- Write the debt off in the accounts in the year of claim; sub-section (2) requires it.
- Track recoveries; they are taxed under section 38(1)(d).
- Primary agricultural credit societies and PCARDBs are excluded from serial 1.
Common mistakes
- Claiming a provision for doubtful debts as an ordinary business; only the listed lenders qualify.
- Computing the 8.5% on total income after Chapter VIII deductions.
- Writing off a trade advance that was never offered to tax and claiming it as a bad debt.
- Making a provision in the accounts without an actual write-off and claiming under sub-section (2).
- Forgetting to offer subsequent recoveries under section 38(1)(d).
This is an explanatory guide, not tax advice, and it does not reproduce the section in full. Read the bare text of the section before you rely on it, and check for later amendments, the Income-tax Rules made under the new Act, and CBDT circulars and notifications.