Karachi, September 13, 2025 – The Federal Board of Revenue (FBR) has once again tightened its grip on tax compliance by issuing clear rules regarding deductions for bad debts during the tax year 2025-26.
Through the updated Income Tax Ordinance, 2001, incorporating amendments from the Finance Act, 2025, the FBR has outlined the circumstances in which taxpayers can claim relief when debts become irrecoverable.
At the heart of this policy lies Section 29 of the Ordinance, which directly addresses the treatment of bad debts. Under the new conditions, a person will only be entitled to a deduction if the debt amount had previously been included in taxable business income, or if it was money lent by a financial institution to generate business income. In addition, the debt must be formally written off in the accounts during the tax year, and there must be reasonable grounds to conclude that the debt is indeed irrecoverable.
The FBR has also clarified that the deduction cannot exceed the amount of the debt actually written off. This prevents exaggerated claims and ensures that only genuine losses qualify. Interestingly, the law also anticipates situations where a previously written-off debt is later recovered, whether in cash or kind. In such cases, the recovered sum is treated as taxable income in the year it is received. On the other hand, if the recovery falls short of the written-off amount, taxpayers are allowed to treat the shortfall as a fresh deduction for bad debts.
Tax experts believe these provisions strike a balance between providing relief to businesses and preventing misuse of deductions. For companies struggling with non-performing receivables, this framework offers a structured pathway to account for their financial losses without creating room for manipulation.
By setting out these conditions, the FBR aims to encourage transparency in financial reporting, particularly among businesses and financial institutions that regularly face challenges of unpaid loans and defaulting clients. The new rules not only define what qualifies as bad debts but also establish accountability when recoveries are eventually made, ensuring that the tax system remains both fair and robust.
Disclaimer: This article is intended for informational purposes only. It summarizes provisions of the Income Tax Ordinance, 2001, as updated through the Finance Act, 2025. Readers are advised not to consider this content as legal or tax advice. For guidance specific to individual circumstances, please consult a qualified tax professional or financial advisor.