Bad Debt

Income Tax Act, 1961 — Section 36(1)(vii); RBI IRACP Norms

A loan or receivable that is unlikely to be recovered and is written off as a loss by the creditor. Under the Income Tax Act, banks can claim deduction for bad debts written off in their accounts. Under RBI norms, accounts classified as "Loss Assets" are treated as bad debts. A bank writing off a debt does not extinguish the legal liability of the borrower — the bank retains its right to sue.

In practice, a bad debt is an accounting and tax event, not the end of the borrower's liability, and that distinction is where creditors and borrowers most often misunderstand each other. When recovery looks improbable, a bank writes the loan off and, under Section 36(1)(vii) of the Income Tax Act, 1961, claims a deduction; under RBI IRACP norms the account sits as a Loss Asset. Crucially, writing off the debt is an internal book entry, it does not extinguish the borrower's legal obligation, and the bank retains its full right to sue, enforce security, and recover. Borrowers who treat a write-off as a discharge are mistaken; later recovery from a written-off account is recognised as income. Counsel use this point both ways: creditors keep pursuing written-off accounts, and borrowers verify whether limitation, not the write-off, has actually barred the claim. Well-advised creditors confirm the underlying right to recover survives the write-off before pressing enforcement.