Sub-section (1) allows a deduction, in computing income chargeable under section 26, for a provision for bad and doubtful debts, but only to the assessees named in column B of the Table and only up to the amount in column C. Table entry 1 covers a scheduled bank other than one incorporated under the laws of a country outside India, a non-scheduled bank, and a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank; for them column C allows not more than 8.5% of the total income of the tax year computed before this deduction and before Chapter VIII, plus an additional amount up to 10% of the aggregate average advances made by rural branches computed in the prescribed manner, and, for a scheduled or non-scheduled bank only, at its option a further amount above that 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". Table entry 2 covers a bank incorporated outside India, a public financial institution, a State Financial Corporation, a State Industrial Investment Corporation and a non-banking financial company, and allows not more than 5% of the total income of the tax year computed before this deduction and Chapter VIII.
Sub-section (2) deals with the bad debt itself: the amount written off as irrecoverable in the accounts is deductible in the year of write-off, subject to three conditions. Clause (a) requires that it was taken into account in computing income of that or an earlier tax year, or that it represents money lent in the ordinary course of a banking or money-lending business. Clause (b) allows the deficiency as a deduction in the year of ultimate recovery where the amount recovered falls short. Clause (c) applies where the assessee is one to whom sub-section (1) applies: only the amount exceeding the credit balance in the provision account is deductible; the deduction is allowed only where the bad debt has been debited to that provision account in that year; and there is to be only one such account, covering all types of advances including those of rural branches.
Sub-section (3) clarifies two points for sub-section (2): a write-off does not include a provision for bad and doubtful debt, and where an amount was taken into account in computing income under income computation and disclosure standards notified under section 276(2) without being recorded in the accounts, it is deductible in the year it becomes irrecoverable and is deemed to have been written off in the accounts.
Why it is there
Lending institutions cannot know in advance which advances will fail, so the section lets a defined class of them deduct a provision within a ceiling instead of waiting for each write-off. The ceilings and the single-account rule keep that concession bounded and prevent the same loss being deducted twice — once as provision and again as write-off. Sub-section (3)(b) closes the gap that would otherwise open where an accounting standard requires an amount to be recognised in income without an entry in the books.
Who it applies to
A scheduled bank, other than a bank incorporated by or under the laws of a country outside India
A non-scheduled bank
A co-operative bank, other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank
A bank incorporated by or under the laws of a country outside India
A public financial institution, a State Financial Corporation or a State Industrial Investment Corporation
A non-banking financial company
Any assessee writing off a bad debt that was taken into account in computing income, or that represents money lent in the ordinary course of banking or money lending
The figures, and what each one turns on
Read the condition in the same row. A figure quoted without it is a wrong answer with a citation attached.
What
Figure
The condition on it
Where
Provision deduction for a scheduled bank, non-scheduled bank or co-operative bank
Not more than 8.5% of total income
Total income of the tax year computed before any deduction under this clause and before Chapter VIII
Sub-section (1), Table Sl. No. 1, column C(a)
Additional provision deduction for rural branches
Up to 10% of the aggregate average advances made by rural branches
Computed in the manner as may be prescribed; available to the same assessees as the 8.5% limb and in addition to it
Sub-section (1), Table Sl. No. 1, column C(a)
Optional further provision deduction
Not more than the income from redemption of securities
Available only to a scheduled bank or a non-scheduled bank, at its option, for income arising under a scheme framed by the Central Government and disclosed in the return under the head "Profits and gains of business or profession"
Sub-section (1), Table Sl. No. 1, column C(b)
Provision deduction for a foreign bank, public financial institution, State Financial Corporation, State Industrial Investment Corporation or non-banking financial company
Not more than 5% of total income
Total income of the tax year computed before any deduction under this clause and before Chapter VIII
Sub-section (1), Table Sl. No. 2, column C
What this means in practice
The percentages are ceilings, not entitlements: column C says "not more than", so a claim has to be the lower of the provision actually made and the limit. The base is a moving one — total income computed before this deduction and before Chapter VIII — so the 8.5% and 5% figures cannot be applied to the assessed total income as finally computed. For an assessee inside sub-section (1), a write-off is not a free-standing deduction: sub-section (2)(c) allows only the amount exceeding the credit balance in the provision account, and only where the debt has been debited to that account in the same year, and there can be only one such account covering all advances including rural ones. The rural addition is measured on aggregate average advances made by rural branches, computed in the prescribed manner, not on the year's total advances, and the optional third limb in entry 1 is confined to scheduled and non-scheduled banks — a co-operative bank cannot use it.
An example
Illustrative only, and invented for this page. The figures are chosen to show the rule biting, not taken from any real matter.
A scheduled bank has total income for the year of Rs. 500 crore computed before this deduction and before Chapter VIII, and aggregate average advances of rural branches of Rs. 200 crore. Its ceiling is Rs. 42.5 crore under the 8.5% limb plus up to Rs. 20 crore under the 10% rural limb — Rs. 62.5 crore in all, and only if it has actually made a provision of that size. If in the same year it writes off Rs. 70 crore of bad debts and the credit balance in its single provision account stands at Rs. 62.5 crore, only Rs. 7.5 crore of the write-off is deductible under sub-section (2)(c)(i), and even that only if the debts were debited to that account during the year.
Where you meet this section
This is worked in a lender's profits and gains computation, and it surfaces in scrutiny as a restriction of the provision to the Table ceiling, or as a disallowance of a write-off that did not pass through the single provision account required by sub-section (2)(c)(iii).
The words themselves
not more than 8.5% of the total income of the tax year computed before making any deduction under this clause and Chapter VIII, and an additional amount up to 10% of the aggregate average advances made by rural branches computed in the manner as may be prescribed
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
Section 31(2)(c)(i), Income-tax Act, 2025.
What people get wrong
Claiming 8.5% or 5% as an entitlement. Column C in both Table entries says "not more than"; the deduction is capped at the provision actually made.
Computing the percentage on assessed total income. Both entries measure it on total income computed before any deduction under that clause and before Chapter VIII.
Giving a co-operative bank the securities-redemption option. Column C(b) of Table entry 1 offers it only to the assessees in clauses (a) and (b) of column B — a scheduled bank and a non-scheduled bank.
Deducting a write-off in full alongside the provision. For an assessee within sub-section (1), sub-section (2)(c)(i) allows only the amount exceeding the credit balance in the provision account.
Maintaining separate provision accounts for rural and other advances. Sub-section (2)(c)(iii) requires a single account related to all types of advances, including advances made by rural branches.
Treating a provision as a write-off. Sub-section (3)(a) says a bad debt written off as irrecoverable does not include any provision for bad and doubtful debt.
What this replaced
The correspondence is the Income Tax Department’s own, from its comparison utility for the 1961 and 2025 Acts. A renumbering is the easy half; whether the words changed is the half that decides cases.
Rules of the Income-tax Rules, 2026 that work section 31. Where the rule’s own heading names the section we say so; the rest are marked on reading the rule, which is our derivation and not the department’s. A rule that serves the section silently and that we have missed will not appear here.
Rule 22 — Computation of aggregate average advances for the purposes of section 31(1) [Table: Sl. No. 1] for deduction for provision of bad and doubtful debt
A circular binds the department, not you and not a court. Every one below was written under the 1961 Act; it reaches this section because the department’s own concordance carries the provision it names to this one.
Circular No. 14/2023 — Standard operating procedure SOP for making application for recomputation of total income of a co operative society engaged in the 2023-07-27
Circular No. 18/2021 — Clarification regarding section 36 1 xvii of the income tax act 1961 inserted vide finance act 2015 2021-10-25
Circular No. 3/2008 — Explanatory Notes to the Provisions of the Finance Act, 2007 2008-03-12
Circular No. 601 — 865. Prima facie adjustments under section 143(1)(a) in respect of disallowance under section 43B and nature of evidence to be enc 1991-06-04
Circular No. 414 — 308. Bonus - Whether deduction under clause (ii), first proviso, is admissible if it is within the minimum 8.33 per cent of salary 1985-03-14
Circular No. 403 — 315. Contribution to approved superannuation fund - Whether pension benefits can be provided to employees under rule 89 of Income- 1984-12-05
Circular No. 287 — 307. Bonus - Whether it would be permissible for employers to claim deduction of bonus paid in excess of amount worked out as per 1980-12-04
Circular No. 162 — 1290. Denial of income-tax clearance certificate to contractors on levy of penalty for concealment and/or conviction - Guidelines 1975-03-24
Circular No. 146 — Provision for estimated service gratuity payable to its employees -Deduction under section 37(1) and section 40A(7) after its inse 1974-09-26
Circular No. 14 — 316. Contribution to approved gratuity fund - Points connected with tax relief in respect of initial contribution under clause (v) 1969-04-23
A notification is made under a power the Act gives and, within that power, is law. These too were made under the 1961 Act and are placed here by the department’s concordance.
Notification No. 9 — A notification under section 36 of the Income-tax Act, 1961 1993-11-23
Notification No. 726E — For the purposes of the said clause in respect of the assessment year commencing on and from the 1st day of April approved under s 1984-09-19
Notification No. 3433 — Following conditions for the deduction of contributions specified under section 36 1965-10-21
Read this before you rely on it. Every decision below was decided under the Income-tax Act, 1961. It appears here because it is tagged to a 1961 provision that the department’s own mapping carries to section 31. That is an inference we have drawn, not a holding on the new section: where the words changed in the move, the reasoning may not survive. Treat this as the place to start looking, not as authority on the 2025 Act.
Badridas Daga v CITSupreme CourtHelps taxpayertagged s.36(1)(vii) My employee embezzled money from the business bank account. Can I write that off for tax?
CIT v Alom Extrusions LtdSupreme CourtHelps taxpayertagged s.36(1)(va) Explanation I paid the pf contribution after year end but before the return due date. Is the deduction gone?
CIT v Mahindra and Mahindra LtdSupreme CourtHelps taxpayertagged s.36(1)(iii) The lender wrote off the principal of a loan I used to buy machinery. Is that taxable?
CIT v Textool Co LtdSupreme CourtHelps taxpayertagged s.36(1)(v) We paid our gratuity money straight to lic while the fund's approval was still pending. Will s.36(1)(v) be denied?
Checkmate Services P Ltd v CITSupreme CourtHelps departmenttagged s.36(1)(va) You deposited employees' pf late but before filing the return. Is the deduction saved?
Hero Cycles (P) Ltd v CITSupreme CourtHelps taxpayertagged s.36(1)(iii) The AO says my borrowings funded advances to a sister concern and my directors. Can he disallow the interest?
Munjal Sales Corporation v CITSupreme CourtHelps taxpayertagged s.36(1)(iii) My firm pays interest on partners' capital. Is the s.40(b)(iv) ceiling the only test the AO can apply?
S.A. Builders Ltd v CIT (Appeals)Supreme CourtCuts both waystagged s.36(1)(iii) I passed borrowed money to my sister concern interest-free. Can the AO disallow the interest I paid?
TRF Ltd v CITSupreme CourtCuts both waystagged s.36(1)(vii) The AO wants proof my debt is actually irrecoverable before allowing the bad debt write-off. Is that right?
CIT v Reliance Utilities and Power LtdHigh CourtHelps taxpayertagged s.36(1)(iii) I have my own funds and borrowings. Can the AO assume the interest-free advance came out of the loan?
ChrysCapital Investment Advisors v DCITHigh CourtCuts both waystagged s.36(1)(ii) The TPO kept a comparable with an abnormal profit margin. Can I get it excluded just for that?
PCIT v KRBL Infrastructure LtdHigh CourtHelps taxpayertagged s.36(1)(iii) The officer accepts my lender exists but says the lender's own purchases were bogus. Do I have to explain where the lender got the money?
Raj Kumar Bothra v DCITHigh CourtHelps taxpayertagged s.36(1)(va) CPC disallowed my late-deposited pf and esi under 143(1)(a). Was a summary adjustment even open to them?
Orient Craft Ltd v DCITITATHelps departmenttagged s.36(1)(va) I withdrew my appeal against the section 143(1) intimation because the case went into scrutiny. Can the Assessing Officer now rectify under section…
Samsung C and T Corporation India P Ltd v DCITITATHelps taxpayertagged s.36(1)(va) CPC issued the section 143(1)(a) notice and passed the intimation a week later, and the portal shows a response I never filed. Is that intimation…
What this page does not tell you. It does not reproduce the section. Everything above was written from the section’s own text as the Income Tax Department publishes it — the text is here, and nothing here is advice on your facts. Where a figure matters, read the sub-section it comes from.
