FBR outlines conditions for claiming bad debt deductions and sets out tax treatment for subsequent recoveries and consumer loan provisions.
ISLAMABAD: The Federal Board of Revenue (FBR) has clarified the rules governing bad debt deductions for Tax Year 2027 under Section 29 of the Income Tax Ordinance, 2001.
According to the Income Tax Ordinance, 2001, updated up to June 30, 2026, a person may claim a deduction for a bad debt if the prescribed conditions are fulfilled.
The debt must have either previously been included in the person’s taxable business income or relate to money lent by a financial institution in deriving taxable business income.
The law further requires the debt, or part of it, to be written off in the person’s accounts during the relevant tax year. There must also be reasonable grounds for believing that the debt is irrecoverable.
The amount claimed as a deduction cannot exceed the amount of the debt actually written off in the accounts during the tax year.
Recovery of previously deducted bad debts
The FBR has also outlined the tax treatment where a person subsequently recovers an amount against a debt for which a bad debt deduction was previously allowed.
If the amount recovered exceeds the difference between the total bad debt and the deduction previously allowed, the excess will be treated as Income from Business in the tax year in which the amount is received.
Where the amount recovered is less than that difference, the shortfall will be allowed as a bad debt deduction when computing business income for the tax year in which the recovery is made.
Provision for consumer loans
The FBR has separately outlined provisions for bad debts arising from consumer loans under Section 29A.
A non-banking finance company or the House Building Finance Corporation may claim a deduction of up to 3% of income for the tax year arising from consumer loans to create a reserve against bad debts from such loans.
If a bad debt cannot be fully adjusted against the reserve, the amount exceeding the available reserve may be carried forward for adjustment against the reserve in subsequent years.
The law defines a consumer loan as money or its equivalent provided by a non-banking finance company or the House Building Finance Corporation to a debtor primarily for personal, family or household purposes.
The definition also covers debts created through the use of a lender’s credit card or a similar arrangement, as well as insurance premium financing.
The provisions form part of the Income Tax Ordinance, 2001, as updated by the FBR for Tax Year 2027.