A provision is not the ordinary trader’s write-off
For tax year 2026–27, section 31(2) of the Income-tax Act, 2025, as amended by Finance Act, 2026, permits a bad debt or part written off as irrecoverable, subject to its conditions. The debt must have entered the claimant’s income computation, or represent ordinary-course banking or money-lending debt. Section 31(3)(a) excludes a mere provision from that write-off. This guide, checked on 27 October 2026, focuses on ordinary trade receivables rather than the specified financial-sector provision regime in subsection (1). Income-tax Act, 2025, as amended by Finance Act, 2026: section 31.
Reconcile the debt before testing the deduction
Identify the invoice, debtor, original income period, subsequent credit notes, receipts, settlement and amount actually removed from the receivable. The examples assume stated trade balances were included in taxable business income, contain no separate GST component, and meet the other conditions unless specified. Supplier advances and personal loans need a separate legal analysis; a business connection alone does not establish the prior-income condition.
Connect the ledger entry to the computation
Prepare a gross-debt bridge and a separate provision bridge. A debit to an expense account with an unchanged gross customer account needs examination before it is described as a completed write-off. Match the actual entry and financial statement treatment; an ageing report or management label is not a substitute. Avoid deducting a provision and then deducting the later write-off again without checking the earlier tax treatment.
Partial write-offs and ultimate settlements
Section 31(2)(b) addresses a deficiency when ultimate recovery is less than the debt remaining after the earlier deduction. Preserve the original debt, earlier deduction and final recovery evidence. Do not use the gross original invoice as the fresh deduction when part has already been deducted. Later excess recoveries require a separate income review; this article does not calculate that charge.
Keep specialised rules outside the ordinary-trader template
Subsection (2)(c) contains provision-account restrictions for the subsection (1) population. Subsection (3)(b) also addresses income recognised under notified ICDS without a book entry. Identify those facts before applying an ordinary invoice model. This guide does not import a bank provision percentage into a trading company or state that every advance write-off is permanently nondeductible under every provision.
Applicable primary references
Income-tax Act, 2025, as amended by Finance Act, 2026: section 31
Six worked illustrations
All facts and amounts below are fictional. Assumptions describe the model, not additional statutory rules.
Illustrative example 1: Full trade write-off
An unpaid ₹1,20,000 sale was included in taxable income in an earlier year. ₹20,000 is collected and the remaining ₹1,00,000 is actually written off as irrecoverable in 2026–27. Assuming all conditions, the working is ₹1,00,000, not the original ₹1,20,000.
Illustrative example 2: Provision only
A trader books a ₹75,000 doubtful-debt provision but makes no qualifying write-off. Under this ordinary-trader model the ₹75,000 book expense does not qualify as a section 31(2) write-off. Add back ₹75,000 if already deducted in arriving at the book-profit starting figure.
Illustrative example 3: Part of a balance
A ₹2,00,000 qualifying debt has ₹60,000 actually written off, leaving ₹1,40,000 receivable. The present write-off working is ₹60,000. Do not deduct the entire customer balance merely because one part is irrecoverable.
Illustrative example 4: Ultimate recovery deficiency
An original qualifying debt is ₹1,00,000; an earlier deduction was ₹30,000. Final settlement recovers ₹50,000. The remaining debt before settlement was ₹70,000, so the further deficiency is ₹20,000 under the stated section 31(2)(b) facts. Total deducted is ₹50,000, equal to ₹1,00,000 less ₹50,000 ultimately recovered.
Illustrative example 5: Earlier provision was added back
Last year’s ₹40,000 provision was added back for tax. This year a qualifying ₹40,000 debt is actually written off against that provision, with no new profit-and-loss charge. A separate ₹40,000 tax deduction may be needed on these assumptions; preserve evidence that no deduction was allowed last year. Do not subtract another ₹40,000 if this year’s starting figure already includes it.
Illustrative example 6: Mixed write-off batch
A ₹90,000 batch comprises ₹70,000 qualifying prior-income trade debts and a ₹20,000 supplier advance never included in income, with no money-lending facts. Only ₹70,000 enters this section 31(2) working on the stated basis. The ₹20,000 needs separate legal classification, not automatic inclusion.
Ten-step verification table
| Step | Action | Evidence |
|---|---|---|
| 1 | Identify the claimant population | Ordinary trader or specialised subsection (1) entity |
| 2 | Fix the tax year and legal version | 2026–27 Act and amendment check |
| 3 | Identify the actual debt | Invoice and debtor-level balance |
| 4 | Trace original taxable income | Prior computation and ledger evidence |
| 5 | Reconcile receipts and credits | Bank receipts and credit notes |
| 6 | Inspect the write-off entry | Approved journal and receivable reduction |
| 7 | Separate provisions and advances | Provision bridge and classification memo |
| 8 | Check earlier deductions | Prior tax computations |
| 9 | Reconcile final settlements | Original debt, deduction and ultimate recovery |
| 10 | Complete and retain the tax bridge | Book starting figure and final deduction |
Sixteen practitioner FAQs
1. Does an overdue invoice automatically qualify?
Age alone does not establish the statutory write-off and other conditions.
2. Can part of a debt be written off?
Section 31(2) covers a debt or part, subject to the conditions.
3. Is a doubtful-debt provision enough for an ordinary trader?
No; section 31(3)(a) distinguishes it from a write-off.
4. Why trace the original income period?
It substantiates that the debt was taken into account in computing the claimant’s income.
5. Does every supplier advance pass that test?
No. Examine its character and other possible provisions separately.
6. Can bank provision percentages be used by a trader?
The subsection (1) regime applies to its specified population, not every business.
7. What if the debt includes GST?
Reconcile that component separately; the examples deliberately assume no separate GST amount.
8. What should the journal evidence show?
The actual accounting treatment and the amount treated as irrecoverable, linked to the debtor.
9. Can management approval replace the entry?
Approval supports the process but does not by itself establish the statutory accounting fact.
10. How are receipts before write-off handled?
Reduce the amount still outstanding before measuring the part written off.
11. What if last year’s provision was disallowed?
Trace the add-back so the later qualifying write-off receives the correct treatment once.
12. Could a tax adjustment duplicate the book charge?
Yes. Reconcile the starting profit and adjustment before claiming an additional deduction.
13. What is an ultimate-recovery deficiency?
The supported shortfall between debt remaining after the earlier deduction and final recovery under subsection (2)(b).
14. Does this guide decide later excess-recovery income?
No. Analyse that receipt under its applicable provision separately.
15. Is income recognised under ICDS without books ignored?
Subsection (3)(b) provides a specific rule; identify those facts rather than forcing an invoice model.
16. What should the final schedule contain?
Debt identity, income history, receipts, actual write-off, prior deductions and the computation adjustment.
Conclusion
Trace trade-debt write-offs to income already recognised and distinguish actual write-offs from provisions before completing the tax deduction working.