Section 43B: Expenses Allowed Only on Actual Payment

Short answer: Section 43B of the Income-tax Act, 1961, mandates that certain business expenses can only be deducted in the financial year they are actually paid, not when the liability is incurred. This rule overrides the normal accrual system of accounting. It covers payments like taxes, statutory dues, loan interest, and most importantly, payments to Micro and Small Enterprises (MSMEs), which have a much stricter payment timeline.

What is Section 43B of the Income Tax Act?

Section 43B states that certain specified expenses are allowed as a deduction for income tax purposes only in the year of actual payment. Normally, businesses following the accrual or mercantile system of accounting can claim an expense when the liability arises, regardless of when it is paid. However, Section 43B creates an exception to ensure timely payment of statutory dues and other critical obligations, forcing businesses to a cash basis for these specific deductions.

Which expenses are covered under Section 43B?

The list of expenses covered under this section is specific and has been expanded over the years. As of FY 2025-26, the key expenses are:

• Taxes, Duties, and Cess: Any sum payable as tax, duty, cess, or fee under any law (e.g., GST, Customs Duty, Professional Tax).
• Employer's Contribution to Provident Fund (PF) or Superannuation Fund: The employer's share of contributions to employee welfare funds like PF, ESI, or gratuity fund.
• Bonus or Commission: Any bonus or commission payable to employees.
• Interest on Loans: Interest on any loan or borrowing from a public financial institution, state financial corporation, or a scheduled bank.
• Leave Encashment: Payments to employees for earned leave.
• Payments to Indian Railways: Any sum payable to Indian Railways for the use of railway assets.
• Payments to Micro and Small Enterprises (MSMEs): Payments for goods or services supplied by Micro and Small Enterprises, as defined under the MSMED Act, 2006. This is covered by Section 43B(h).

What is the new rule for payments to MSMEs under Section 43B(h)?

Section 43B(h), introduced by the Finance Act, 2023, is a significant compliance requirement for businesses. It stipulates that any sum owed to a Micro or Small Enterprise must be paid within the time limit specified in Section 15 of the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006. If not paid within this timeframe, the expense is disallowed for that financial year and can only be claimed in the year it is actually paid. This rule does not apply to payments to Medium enterprises or suppliers who are not registered as Micro or Small under the Udyam portal.

When is an expense "paid" for Section 43B purposes?

For most expenses under Section 43B, an amount is considered "paid" if the payment is made on or before the due date for filing the Income Tax Return (ITR) for that financial year under Section 139(1). However, the rule for MSME payments is much stricter and does not extend to the ITR filing date.

Expense Category	Due Date for Payment to Claim Deduction in FY 2025-26	Remarks
GST, Customs Duty, Cess	On or before the ITR due date (e.g., 31 Oct 2026 for companies)	Must be paid and cleared to the government's account.
Interest on Bank Loan	On or before the ITR due date.	Does not apply to interest on loans from NBFCs (unless specified).
Employee Bonus/Commission	On or before the ITR due date.	Applies to statutory and contractual bonuses.
Payment to Micro/Small Enterprise (with written agreement)	Within 45 days of acceptance of goods/services.	The agreement must specify a credit period not exceeding 45 days.
Payment to Micro/Small Enterprise (no written agreement)	Within 15 days of acceptance of goods/services.	This is the default timeline.
Employer's PF/ESI Contribution	Before the due date under the respective PF/ESI Acts.	This has a stricter interpretation and is not extended to the ITR filing date.

What happens if I don't pay an expense covered by Section 43B on time?

If you fail to pay a specified expense within the prescribed timeline, the amount will be disallowed as a deduction while computing your business income for that financial year. This increases your taxable profit and consequently, your tax liability. The disallowed expense can then be claimed as a deduction in the financial year in which you actually make the payment. For example, if a payment due to an MSME in March 2026 is not made by 31st March 2026 and also violates the 15/45 day rule, it will be disallowed in FY 2025-26. If you pay it in April 2026, you can claim the deduction in FY 2026-27.

How do I identify MSME suppliers?

It is now critical for businesses to identify which of their suppliers are registered as Micro or Small Enterprises. You cannot claim ignorance. The best practices are:

1. Request Udyam Certificate: Proactively ask all your suppliers to provide a copy of their Udyam Registration Certificate.
2. Verify on Udyam Portal: Use the supplier's Udyam Registration Number (URN) to verify their status on the official Udyam portal. The portal clearly shows whether the enterprise is Micro, Small, or Medium.
3. Update Vendor Master: Maintain a record of the MSME status of all your vendors in your accounting software or vendor master file.
4. Include in Purchase Orders: Mention on your purchase orders that suppliers must declare their MSME status. For more details, refer to our guide on the MSME 45-day payment rule.

Worked example

Let's consider Zenith Innovations Pvt. Ltd., a software company in Bengaluru, for the financial year 2025-26 (Assessment Year 2026-27). The company's turnover is ₹12 Crore, and its ITR filing due date is 31st October 2026.

Here are some of its accrued expenses for FY 2025-26:

• GST Payable: ₹3,50,000 for March 2026.
• Employee Bonus: ₹8,00,000 declared for the year.
• Payment to Supplier A (Micro Enterprise): Invoice of ₹1,00,000 dated 1st March 2026. No written agreement on payment terms.
• Payment to Supplier B (Small Enterprise): Invoice of ₹2,50,000 dated 15th February 2026. A written agreement allows a 45-day credit period.

Analysis of Deductibility:

1. GST Payment: Zenith Innovations pays the ₹3,50,000 GST on 20th April 2026. Since this is before the ITR due date of 31st October 2026, the full amount is allowed as a deduction in FY 2025-26.

2. Employee Bonus: The company pays the bonus of ₹8,00,000 on 10th October 2026. This is also before the ITR due date, so the full amount is allowed in FY 2025-26.

3. Payment to Supplier A (Micro): The due date under the MSMED Act is 15 days from the invoice date (since there's no agreement), which is 16th March 2026. The company pays on 5th April 2026. Since the payment was made after the MSMED Act due date, the expense of ₹1,00,000 is disallowed for FY 2025-26. It will be allowed in FY 2026-27.

4. Payment to Supplier B (Small): The due date is 45 days from the invoice date, i.e., 31st March 2026. The company pays on 28th March 2026. Since the payment was made within the MSMED Act timeline, the expense of ₹2,50,000 is allowed in FY 2025-26.

Common mistakes

1. Ignoring MSME Status: Failing to track which suppliers are Micro or Small Enterprises, leading to unintentional non-compliance with Section 43B(h).
2. Assuming ITR Due Date Applies to All: Believing that all Section 43B payments can be made before the ITR filing date. This is incorrect for MSME payments and employer's PF/ESI contributions.
3. Not Differentiating Micro/Small from Medium: Section 43B(h) applies only to Micro and Small Enterprises. Payments to Medium enterprises are not covered by this specific clause.
4. Booking Expense on Accrual without Payment: Forgetting to add back the unpaid expenses covered by Section 43B while calculating taxable income. This is a common error found during a tax audit under Section 44AB.
5. Forgetting to Claim in a Later Year: After an expense is disallowed, forgetting to claim it as a deduction in the subsequent year when the payment is finally made.

How SP & SC helps

Navigating the complexities of Section 43B, especially the stringent MSME payment rules, requires careful financial planning and robust accounting processes. SP & SC Legal and Taxation Services provides expert tax consultation to help businesses streamline their vendor payment systems, review compliance with Section 43B, and ensure accurate tax computation. We assist in structuring payables, preparing for tax audits, and representing your case before tax authorities to avoid unnecessary disallowances and penalties.

Frequently asked questions

H3: Is Section 43B applicable to professionals?

Yes, Section 43B applies to income chargeable under the head "Profits and gains of business or profession". Therefore, professionals like doctors, lawyers, and consultants who maintain books of accounts on a mercantile (accrual) basis are also covered.

H3: What if the supplier is a Medium Enterprise?

Section 43B(h) only covers payments to Micro and Small enterprises. If your supplier is classified as a Medium Enterprise, this specific clause does not apply, and you can claim the deduction on an accrual basis, provided the expense is not covered by any other clause of Section 43B.

H3: Does Section 43B apply if I opt for presumptive taxation?

No. If you opt for a presumptive taxation scheme like Section 44AD or 44ADA, your income is calculated as a percentage of your gross turnover or receipts. You are not required to claim individual expenses, so the provisions of Section 43B do not apply.

H3: Can I pay an MSME supplier after the 45-day limit but before my ITR filing date?

No. For payments to MSMEs under Section 43B(h), the timeline specified in the MSMED Act (15/45 days) is absolute. The extension up to the ITR filing due date is not available for these payments. If you pay after the 15/45 day limit, the expense will be disallowed for that year, even if paid before filing the ITR.

H3: What constitutes "acceptance" of goods or services for the 15/45 day rule?

The "day of acceptance" is the day of the actual delivery of goods or rendering of services. If the buyer raises an objection in writing within 15 days, it is the day on which the supplier resolves that objection.

Get a fixed-fee quote

Are you concerned about Section 43B compliance and its impact on your tax liability? Share your financial documents with us for a comprehensive review and a written fixed-fee quote. Contact SP & SC today, or WhatsApp us at +91 90356 74566. We manage all aspects of tax compliance and advisory, from process setup to representation, end to end.