Recovery is not always taxable in full
Section 38(1)(d) of the Income-tax Act, 2025 taxes the excess of subsequent recovery over the difference between the debt and the bad-debt deduction allowed under section 31(2). This guide checks the Act as amended by Finance Act, 2026 on 27 October 2026. It concerns the recovery calculation once those statutory facts are established, rather than eligibility for a new write-off. 2025 Act as amended by Finance Act, 2026: sections 31 and 38.
Use the allowed deduction, not the expense label
Retrieve the debt history and actual tax allowance. A book provision, claimed deduction, processed computation and final allowance after an order may differ. The statutory calculation uses the amount allowed. Record original debt, prior collections, the part relevant to the allowance and the later recovered amount on a consistent basis. Exclude unrelated interest, GST, compensation and collection costs from the simple principal model; classify them independently. 2025 Act as amended by Finance Act, 2026: sections 31 and 38.
Calculate debt by debt
For an established section 31(2) case, let D be the relevant debt, A the deduction allowed and R the subsequent recovery. The remaining tax balance is D minus A. The section 38(1)(d) income is the positive excess of R over that balance. Keep prior recoveries and earlier charges visible where receipts arrive in instalments, so an already consumed balance is not used again. The examples use single final recoveries or separately identified debts and assume D and A have been established correctly. 2025 Act as amended by Finance Act, 2026: sections 31 and 38.
Reconcile the book credit before adding income
If recovery has already entered the profit starting figure, do not add the same taxable part again. Conversely, cash credited only against a receivable does not necessarily put the relevant tax income into that starting figure. Prepare two columns: amount already included in book profit and amount chargeable under the applicable provision. The reconciling adjustment follows their difference, with each accounting entry supported. 2025 Act as amended by Finance Act, 2026: sections 31 and 38.
Cessation and earlier-law cases need separate attention
Section 38(5) states that subsection (1)(d) applies even when the business no longer exists. Closing the business does not itself erase the recovery rule. Section 38(3) contains a separate, qualified rule for specified unabsorbed cessation-year losses; do not assume any historic loss can be deducted. For debts allowed under the 1961 Act, verify the governing earlier provision and transition rules instead of mechanically applying new section numbers to an earlier return. 2025 Act as amended by Finance Act, 2026: sections 31 and 38.
Close the evidence and calculation together
Preserve debtor-wise orders, write-off entries, tax computations, settlement letters and bank receipts. Distinguish an actual receipt from a settlement promise, and distinguish the principal recovery from a reversal of an accounting provision that never obtained tax relief. The formula demonstrates income under the stated provision, not tax payable after rates, losses, surcharge or cess. No universal ITR field or assessment-year utility is asserted here. 2025 Act as amended by Finance Act, 2026: sections 31 and 38.
Applicable primary references
2025 Act as amended by Finance Act, 2026: sections 31 and 38
Six worked illustrations
All facts and amounts below are fictional. Assumptions describe the model, not additional statutory rules.
Illustrative example 1: Part deduction and high recovery
Debt is ₹1,00,000 and deduction actually allowed is ₹30,000. A single subsequent final recovery is ₹90,000. Remaining tax balance is ₹70,000, so income under the stated rule is ₹20,000, not ₹90,000.
Illustrative example 2: Recovery below remaining balance
For debt ₹1,00,000 and allowed deduction ₹30,000, recovery of ₹60,000 is below the remaining ₹70,000. The positive excess is zero. This conclusion concerns this recovery charge, not any separate further bad-debt deduction.
Illustrative example 3: Full earlier allowance
Debt and allowed deduction are each ₹1,00,000. Remaining tax balance is zero. Subsequent recovery of ₹25,000 therefore produces ₹25,000 income under the model.
Illustrative example 4: Larger partial allowance
Debt is ₹2,00,000, allowed deduction ₹80,000 and final recovery ₹1,50,000. The remaining balance is ₹1,20,000; taxable excess is ₹30,000. Do not substitute a different book provision for the allowed ₹80,000.
Illustrative example 5: Separate two debt histories
Debt A is ₹1,20,000 with ₹40,000 allowed and ₹90,000 recovered: income is ₹10,000. Debt B is ₹80,000, wholly allowed, with ₹20,000 recovered: income is ₹20,000. Total recovery income is ₹30,000; preserve both workings.
Illustrative example 6: Recovery already credited to profit
Use the first example, but assume books credit the full ₹90,000 recovery to income. The statutory income is ₹20,000. The reconciliation removes the ₹70,000 non-chargeable principal portion on these facts; adding another ₹20,000 to the unadjusted book credit would double-count it.
Ten-step verification table
| Step | Action | Evidence |
|---|---|---|
| 1 | Identify the debt | Debtor and invoice history |
| 2 | Establish applicable law | Year, allowance provision and transition analysis |
| 3 | Confirm prior allowance | Return, intimation and orders |
| 4 | Separate debt components | Principal, interest and other items |
| 5 | Verify recovery event | Settlement and receipt evidence |
| 6 | Compute remaining tax balance | Debt less allowed deduction |
| 7 | Check previous recovery charges | Receipt-by-receipt history |
| 8 | Compare book income | Ledger entry and computation starting figure |
| 9 | Review cessation or losses | Specific statutory conditions |
| 10 | Close the income reconciliation | Approved working and supporting records |
Sixteen practitioner FAQs
1. Is every recovered rupee taxable?
Not under every partial-allowance case. Apply the statutory difference using the deduction actually allowed.
2. Which amount is A in the formula?
The relevant bad-debt deduction allowed under section 31(2), not simply the expense booked or deduction claimed.
3. Does a book provision prove an earlier tax allowance?
No. Trace the tax treatment and supporting return or order separately.
4. What is the remaining tax balance?
In the stated model it is the relevant debt minus the deduction allowed.
5. Can a negative excess become negative recovery income?
The charge described is the excess where recovery exceeds the balance. Do not create a negative income figure from this formula.
6. Is the whole recovery taxable after full allowance?
With no remaining tax balance and the stated conditions met, the recovered principal enters the charge.
7. Should different debtors be pooled?
Keep each debt and its allowance history separate before aggregating the resulting income.
8. How are multiple receipts handled?
Track cumulative recovery and earlier income charges so the remaining balance is not used repeatedly.
9. Does book income always equal tax income?
No. The book entry and the statutory balance can differ, requiring a supported reconciliation.
10. Must taxable recovery be added again if already credited?
No. Check the computation starting figure to prevent a duplicate addition.
11. Does business closure remove the charge?
Section 38(5) preserves application of subsection (1)(d) even if the business no longer exists.
12. Can all old losses be set off after closure?
No. Section 38(3) has specific conditions; do not infer unrestricted availability.
13. Does this article map a 1961 Act return to new numbers?
No. Earlier-law allowances and returns need their applicable provision and transition analysis.
14. Are collection expenses subtracted automatically in the formula?
No. The examples isolate principal recovery; expense treatment needs an independent legal and accounting analysis.
15. Is the calculated income the final tax demand?
No. Tax payable also depends on the applicable computation and other independently verified factors.
16. What closes a reliable review?
A debtor-wise reconciliation of allowance evidence, recoveries, book credits, earlier charges and current income.
Conclusion
Compute bad-debt recovery income under section 38(1)(d), using the deduction actually allowed, the unrecovered tax balance and the amount already credited in books.