Moment guide · FY 2026-27

I am writing off a bad debt from my business

When is a bad debt deductible under section 36(1)(vii)?

A business debt actually written off in the books as irrecoverable is deductible under section 36(1)(vii), without needing court proof. But a provision for doubtful debts is not deductible for ordinary businesses, and if you later recover a written-off amount, the recovery is taxable under section 41(4) in the year received.

The #1 trap

Deducting a provision for doubtful debts as if it were a write-off — a provision is not deductible for a normal business; the debt must actually be written off in the books under section 36(1)(vii). And when a written-off debt is later recovered, the recovery is taxable under section 41(4), so the 'saving' reverses itself.

Rohit, manufacturer recovering an old written-off debt

Rohit's manufacturing business supplied goods worth ₹5,00,000 to a customer who became insolvent. In FY 2024-25 he wrote off the ₹5,00,000 in his books as irrecoverable, and under section 36(1)(vii) the write-off is deductible in that year, because the sale had already been included in income and the debt has the character of a business debt. No court decree or recovery proceedings are required — the write-off in the books is sufficient evidence. In FY 2025-26 the insolvency resolution process returns ₹2,00,000 to Rohit, and under section 41(4) that ₹2,00,000 is taxable as business income in the year of recovery, even though the original write-off year has passed. His net deduction across the two years is ₹5,00,000 minus ₹2,00,000, which is ₹3,00,000. Rohit's accountant suggested creating a ₹1,00,000 provision for another doubtful customer instead of writing it off, but a provision is not deductible for a non-banking business — only an actual write-off qualifies under section 36(1)(vii) — so he writes off the ₹1,00,000 only when it becomes genuinely irrecoverable. A bank or NBFC, by contrast, can deduct provisions under the specific section 36(1)(viia) rules. Rohit keeps the ledger entries, the customer's insolvency documents and the recovery statement to substantiate both the write-off and the section 41(4) inclusion. A quick call with us dials in the final figure. Rohit also confirms that the debt must have been included in his income earlier, so a loan advanced to a customer without a corresponding sale is not a deductible bad debt under section 36(1)(vii). The write-off must be a genuine book entry made in the year the debt is claimed, and the auditor's report and the ledger entry are the evidence the department accepts. If the debt is partly recovered, only the un-recovered balance stays deducted and the recovery is taxed under section 41(4) in the year received. If the customer's insolvency proceeding concludes with a settlement of ₹1,00,000 on a ₹1,50,000 debt, Rohit deducts the ₹50,000 shortfall in the settlement year, and the ₹1,00,000 received is not income because the original debt was never written off. For a bank or NBFC, the provision-based deduction under 36(1)(viia) works differently, with percentage limits on the provision. He keeps the ledger entries, the insolvency documents and the recovery statements, and he never claims a mere provision as a write-off. A quick call with us dials in the final figure.