A provision for doubtful debts (or allowance for expected credit loss) reduces receivables on the balance sheet by the amount a business expects not to recover. Companies following Ind AS 109 measure it as expected credit loss; others use the applicable accounting standards and a reasonable estimate, often by ageing bucket. For income tax, a provision is not a write-off: Explanation 1 to Section 36(1)(vii) excludes it from the bad-debt deduction.
How it works in India
The simplest method is a provision matrix: apply an assumed loss rate to each bucket of the ageing report, with higher rates for older buckets. Specific provisions are added for buyers known to be in trouble, such as one that has stopped responding or is before the NCLT. The accounting entry debits the profit and loss account and credits the provision. When a debt is later written off, it is set against the provision; if it is recovered, the provision is reversed.
Why it matters for getting paid
A large provision is a signal, not a solution. It tells the owner and the bank how much cash is stuck, but it recovers nothing. Each rupee provided for is a rupee that a timely legal notice or an MSME Samadhaan claim might still bring in. Reducing the provision through recovery also improves reported profit and the working capital assessment by your lender.
How FundRaksha uses it
When clients share their provision schedule, FundRaksha's advocates start with the invoices provided for specifically, because these are usually the oldest and most at risk of limitation. About 60% of cases settle before court, often from a notice sent within 24 hours. The fee is 30% of recovery only. Book a free consultation to review your provisioned dues.
Worked example (hypothetical)
A Bengaluru IT services company applies assumed loss rates to its receivables at year end:
| Bucket | Receivables | Assumed loss rate | Provision |
|---|---|---|---|
| 0-30 days | ₹50,00,000 | 1% | ₹50,000 |
| 31-90 days | ₹20,00,000 | 5% | ₹1,00,000 |
| 91-180 days | ₹8,00,000 | 20% | ₹1,60,000 |
| 180+ days | ₹4,00,000 | 50% | ₹2,00,000 |
| Total | ₹82,00,000 | ₹5,10,000 |
The ₹5,10,000 provision is charged to profit, but is added back in the tax computation because it is not a write-off. In the next year a legal notice recovers ₹3,00,000 of the 180+ bucket, and the related provision is reversed.
Last reviewed: 2026-10-08. Information for Indian businesses; not legal advice.