1. Section 43B: The Payment-Based Deduction Rule
Section 43B of ITA 2025 is one of the most important provisions for businesses maintaining accrual (mercantile) accounting. It overrides the normal accrual principle for certain specified expenses — requiring actual payment before the ITR due date as a condition for deduction. If payment is delayed, the deduction shifts to the year of actual payment — potentially increasing taxable income significantly.
2. Items Covered Under Section 43B
| Item | Deductible When |
|---|---|
| Employer contribution to PF (EPF, VPF) | Paid before ITR due date for the year |
| Employer contribution to ESI | Paid before ITR due date |
| Employer contribution to gratuity fund | Paid to approved gratuity fund before ITR due date |
| Employee bonus | Paid before ITR due date |
| TDS deducted but not deposited | Deposited before ITR due date |
| Interest on bank/FI loans | Actually paid (not merely accrued) |
| Payments to MSME suppliers (Section 43B(h)) | Within 45 days of acceptance (15 days if no agreement) |
3. MSME 45-Day Rule: Section 43B(h)
Finance Act 2023 added Section 43B(h) — one of the most impactful compliance requirements for businesses dealing with MSME suppliers:
- Applicable when the supplier is a registered Micro or Small Enterprise (not Medium) under the MSMED Act 2006
- Payment must be made within 45 days of acceptance of goods/services if a written agreement exists, or within 15 days if no written agreement
- If payment is delayed: the amount is disallowed as a deduction in the year of accrual — it shifts to the year of actual payment
- Applies to buyers maintaining mercantile accounting — not to cash basis taxpayers
4. MSME Identification: Udyam Registration
The MSME 45-day rule applies only to registered MSMEs — those with Udyam Registration Certificate from the MSME Ministry. Ask all suppliers for their Udyam registration status. Verify at the Udyam portal online. Categories:
- Micro: investment up to Rs 1 crore AND turnover up to Rs 5 crore
- Small: investment up to Rs 10 crore AND turnover up to Rs 50 crore
- Medium: investment up to Rs 50 crore AND turnover up to Rs 250 crore
- Only Micro and Small are covered by Section 43B(h) — Medium is NOT covered
5. March 31 Year-End: Practical Impact
Many businesses review their MSME vendor payables before 31 March each year. If outstanding MSME dues are not paid by 31 March, the deduction is lost for that Tax Year. Practical steps for businesses:
- Create a list of all vendors who are registered MSMEs
- Track invoice acceptance dates separately for MSME vendors
- Set up 30-day payment reminders for MSME invoices (to have buffer before 45-day deadline)
- Before year-end: sweep and pay all outstanding MSME dues before 31 March
- If genuinely unable to pay, document the reason — but the disallowance applies regardless
6. PF and ESI: Common Year-End Issue
Employer PF and ESI contributions deducted from employee salaries must be deposited with EPFO/ESIC and also deducted under Section 43B by the ITR due date. A common issue: March salary PF/ESI deducted but not deposited until April/May. Under Section 43B, this deposit must happen before the ITR due date (31 July for non-audit) to be deductible for that Tax Year. If deposited after ITR due date: deductible only in the next Tax Year (when actually deposited).
7. Bonus Payments
Employee bonuses are deductible under Section 43B only when actually paid — not when merely provided/accrued in the books. A common year-end accounting entry of "provision for bonus" creates a P&L deduction — but this is disallowed under Section 43B until the bonus is actually paid to employees. Businesses that declare bonuses in March but pay them in April/May need to add back the provision in their tax computation for March.
8. Practical Tax Computation Adjustment
Illustrative only. XYZ Pvt Ltd (non-audit, ITR due 31 July 2027) has for Tax Year 2026-27:
- PF provision in books: Rs 12L (deposited to EPFO by 30 June 2027 — before ITR due date) → DEDUCTIBLE
- Bonus provision: Rs 8L (paid to employees on 1 August 2027 — after ITR due date) → NOT deductible for 2026-27; deductible in 2027-28
- MSME vendor outstanding: Rs 5L (invoice accepted January 2027, paid June 2027 = 150 days) → NOT deductible for 2026-27; deductible in 2027-28
- Net taxable income addition = Rs 8L (bonus) + Rs 5L (MSME) = Rs 13L extra income for 2026-27
9. Why TaxClue
Section 43B disallowances are one of the most common unexpected additions in business tax assessments. TaxClue audits all accrued-but-unpaid expenses and identifies Section 43B timing issues before filing ITR. Contact us for business tax advisory and compliance under ITA 2025.