Note: this article is general guidance only and is not tax advice. Always confirm your specific case with a chartered accountant or tax adviser.
Selling a debt for less than its face value has tax consequences in India, generally reasonable and often favourable to the seller. Here are the key points.
Businesses: the loss and bad-debt write-off
If you sell a ₹10,00,000 receivable for ₹6,00,000, you crystallise a ₹4,00,000 shortfall. Where the amount was earlier taken into account as income, a bad debt written off as irrecoverable in the accounts is generally deductible under section 36(1)(vii) of the Income-tax Act, 1961, read with section 36(2).
A genuine, arm's-length sale to an independent buyer objectively documents the impairment of the receivable, often stronger evidence before the tax authorities than an internal provision alone.
The GST position
Watch this point carefully. GST is charged on the underlying supply of goods or services, not on the assignment of the resulting receivable. The assignment of an actionable claim (other than lottery, betting and gambling) is generally outside the scope of GST as neither goods nor services. Importantly, selling the debt does not by itself let you recover GST already paid on the original invoice, so plan the timing with your adviser.
For the buyer
The buyer is taxed when they collect more than they paid: that surplus is income or gain in their hands. Until they actually recover, there is no taxable profit on the deal.
Keep clean records
- The original invoice and ledger showing the amount as income.
- The deed of assignment and the ₹ price received.
- The section 130 notice served on the debtor.
- The write-off entry in your books for the year.
You can review the Income-tax Act on the Income Tax Department portal.
Practical summary
Selling an uncollectable debt not only brings in cash, it lets you crystallise the loss and close the file. Coordinate the transaction with your adviser to optimise the write-off and GST position. Debtalia connects sellers directly with buyers, anonymously and with no commission on the sale.
