Income Tax · FY 2025-26 (AY 2026-27)

Section 43B — Deductions Allowed
Only on Actual Payment

PF, taxes, bonus, leave encashment, bank interest and MSME dues are deductible only when you actually pay them. The 43B(h) clause disallows late payments to Micro & Small suppliers — here is how the timing works.

Updated for FY 2025-26 43B(h) MSME rule covered CA reviewed

Talk to a Tax Expert See 43B(h) MSME rule

PaymentBasis of deduction

45 / 15MSME days — 43B(h)

AY 2024-2543B(h) effective from

Sec 37New Act 2025 number

Quick Answer

Section 43B lets you deduct certain business expenses only in the year you actually pay them — not when they accrue. Covered items include GST/taxes, employer PF & ESI, bonus, leave encashment and bank/NBFC interest. For most of these, paying before the ITR due date preserves the deduction. The 43B(h) MSME clause is stricter: dues to a Micro or Small supplier must be paid within 15 days (no agreement) or up to 45 days (agreement), or the deduction is disallowed until actually paid.

Deduction basis Actual payment

General 43B — pay by ITR due date

43B(h) MSME 15 / 45 days

Old 43B → new Sec 37 (2025)

The rule

What Is Section 43B?

Section 43B of the Income-tax Act, 1961 is an overriding provision. Normally a business following the mercantile (accrual) system deducts an expense in the year it is incurred, even if unpaid. Section 43B says that for a specific list of expenses, the deduction is available only in the previous year in which the sum is actually paid — whatever the method of accounting.

A proviso softens this for most clauses: if the amount is paid on or before the due date for filing the return under Section 139(1), the deduction is allowed in the accrual year itself. The 43B(h) MSME clause is the key exception — that proviso does not apply to it.

New Income-tax Act, 2025 — same rule, new number

From Tax Year 2026-27 (1 April 2026), the Income-tax Act, 2025 renumbers Section 43B as Section 37 ("Certain deductions allowed on actual payment basis only"). The substance — including the 43B(h) MSME clause — is unchanged. For your FY 2025-26 return, keep referring to Section 43B.

The list

Expenses Covered Under Section 43B

Each clause below is deductible only on actual payment. All except 43B(h) enjoy the "pay before ITR due date" relief.

Clause	Expense	Deductible when	Notes
(a)	Tax, duty, cess or fee to Government	On payment	GST, customs, excise, property tax, etc.
(b)	Employer contribution to PF, ESI, superannuation, gratuity fund	On deposit	Deposit by ITR due date for same-year claim
(c)	Bonus or commission to employees	On payment	Statutory/contractual bonus, not dividend
(d)	Interest on loan from bank / NBFC / financial institution	On payment	Converted/funded interest is not "paid"
(e)	Interest on loan from a scheduled/co-op bank	On payment	Same actual-payment condition
(f)	Leave encashment to employees	On payment	Provision not deductible until paid
(g)	Sum payable to Indian Railways for use of assets	On payment	Rail freight / hire charges
(h) NEW	Sum payable to a Micro or Small enterprise (MSME)	15 / 45 days	From AY 2024-25 · no ITR-due-date relief

Employee's share of PF/ESI is governed separately (see PF/ESI section) — the Supreme Court in Checkmate Services (2022) held late deposit is permanently disallowed.

Since AY 2024-25

Section 43B(h): The MSME 45-Day Payment Rule

Clause (h), inserted by the Finance Act 2023 and effective from AY 2024-25, links your income-tax deduction to Section 15 of the MSMED Act, 2006. If you buy goods or services from a supplier registered as a Micro or Small enterprise and do not pay within the statutory limit, the amount is disallowed in the year of accrual and allowed only in the year you actually pay.

Situation	Payment deadline	If missed
Written agreement with the MSME supplier	Agreed period, max 45 days	Disallowed — shifts to year of payment
No written agreement	Within 15 days	Disallowed — shifts to year of payment
Paid late but before 31 March	Within the same FY	Allowed in that FY
Supplier is a Medium enterprise	Not covered by 43B(h)	Allowed on normal accrual
Supplier is a Trader / not Udyam-registered	Not covered by 43B(h)	Allowed on normal accrual

Only "Micro" and "Small" manufacturers/service providers with a Udyam certificate are covered. Wholesale/retail traders were excluded from the 43B(h) benefit by MSME clarification.

The 43B(h) trap the ITR-due-date proviso does NOT rescue

Unlike PF, tax or bonus, an overdue MSME payment cannot be "fixed" by paying before the return due date. If the 15/45-day window is breached and the amount is still unpaid on 31 March, it is added back to income for that year — you get the deduction only when you actually pay. Maintain a Udyam-classified vendor register.

Worried about 43B(h) add-backs in your tax audit? Get your MSME payables reviewed.

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Special rule

PF / ESI — Employer Share vs Employee Share

This is the most litigated part of 43B. Treat the two shares differently:

43B

Employer contribution

Governed by Section 43B(b)
Deductible if deposited by the ITR due date
Late deposit only defers the deduction to year of payment
No permanent loss

36(1)(va)

Employee contribution (deducted from salary)

Governed by Section 36(1)(va) — not 43B
Must be deposited by the PF/ESI statutory due date (15th/next-month)
Checkmate Services (SC, 2022): late deposit is permanently disallowed
Cannot be rescued by paying before ITR due date

Worked example

When Do You Get the Deduction?

Bonus of Rs 5,00,000 declared Mar 2026

Accrued inFY 2025-26

Paid on20 Jul 2026 (before ITR due date)

43B provisoApplies

Deductible inFY 2025-26

MSME dues Rs 3,00,000, no agreement

Invoice/acceptance10 Feb 2026

15-day limit25 Feb 2026

Actually paid30 Jun 2026 (unpaid at 31 Mar)

Deductible inFY 2026-27

Scenario	Deduction in FY 2025-26?
PF (employer) deposited 20 Oct 2026, before ITR due date	Yes
PF (employer) deposited 5 Dec 2026, after ITR due date	No — FY 2026-27
Employee PF share deposited after statutory due date	No — permanently disallowed
GST paid 15 Sep 2026, before ITR filing	Yes
MSME (small) supplier — 60-day delay, 45-day agreement, unpaid 31 Mar	No — year of payment
Bank interest converted into a fresh loan (funded interest)	No — not "paid"

Tax-audit reporting

43B disallowances are reported in Clause 26 of Form 3CD, and 43B(h) MSME details in Clause 22. Getting these wrong triggers an add-back at assessment. A tax audit under Section 44AB makes accurate 43B tracking essential.

Government sourcesAct & sections: incometax.gov.in · Section 43B / 43B(h): inserted by Finance Act 2023, eff. AY 2024-25 · Employee PF: Section 36(1)(va) & Checkmate Services Pvt Ltd v. CIT (SC, 2022) · MSMED Act, 2006 — Section 15 (15/45-day payment) · New law: Section 37, Income-tax Act, 2025 (from Tax Year 2026-27)

Section 43B — Frequently Asked Questions

Basics

What is Section 43B of the Income-tax Act?

Section 43B is an overriding provision that allows certain business expenses as a deduction only in the year they are actually paid, not the year they accrue. Covered items include taxes and duties, employer PF/ESI and other fund contributions, bonus and commission, leave encashment, interest to banks/NBFCs, sums to Indian Railways, and (from AY 2024-25) overdue payments to Micro and Small enterprises under clause (h).

Is Section 43B on accrual or payment basis?

On payment basis. Even if you follow the mercantile (accrual) system, the listed 43B expenses are deductible only when actually paid. For all clauses except 43B(h), paying on or before the due date of filing the return under Section 139(1) lets you claim the deduction in the accrual year.

Has Section 43B been renumbered in the Income-tax Act 2025?

Yes. Under the Income-tax Act, 2025 (in force from 1 April 2026, i.e. Tax Year 2026-27) the payment-basis rule now sits in Section 37, titled "Certain deductions allowed on actual payment basis only." The substance, including the MSME clause, is unchanged. For FY 2025-26 returns you continue to refer to Section 43B of the 1961 Act.

Is Section 43B disallowance permanent?

Generally no. A 43B disallowance only defers the deduction to the year of actual payment — you do not lose it permanently. The one permanent loss is the employee's share of PF/ESI deposited after the statutory due date, which is disallowed under Section 36(1)(va) per the Supreme Court in Checkmate Services (2022).

43B(h) MSME

What is Section 43B(h)?

Section 43B(h), inserted by the Finance Act 2023 and effective from AY 2024-25, disallows a deduction for any sum payable to a Micro or Small enterprise if it is not paid within the time limit under Section 15 of the MSMED Act, 2006 — 45 days where a written agreement exists, or 15 days where there is no agreement. If missed, the deduction shifts to the year of actual payment.

What is the 45-day rule for MSME payments?

If you have a written agreement with a Micro or Small supplier, you must pay within the agreed credit period, subject to a statutory maximum of 45 days from the day of acceptance of goods/services. Without an agreement, the limit is 15 days. Pay within the limit to keep the income-tax deduction in the accrual year.

Can I pay an MSME supplier before the ITR due date to save the 43B deduction?

No. Unlike other 43B items, the "pay before the return due date" proviso does not apply to clause (h). What matters is whether the amount was paid within the 15/45-day MSMED limit and whether it was unpaid on 31 March. If it was overdue and still unpaid at year-end, it is added back and allowed only when actually paid.

Are Medium enterprises covered under 43B(h)?

No. Section 43B(h) applies only to suppliers registered as Micro or Small enterprises under the MSMED Act. Payments to Medium enterprises and to non-registered/large suppliers are outside 43B(h) and follow normal accrual deduction rules.

Are traders covered under Section 43B(h)?

No. Wholesale and retail traders, though they may hold Udyam registration for priority-sector lending, are not treated as covered "suppliers" for the 43B(h) benefit per MSME clarification. Only Micro/Small manufacturers and service providers with Udyam registration trigger the 15/45-day disallowance.

How do I know if my supplier is an MSME for 43B(h)?

Ask for the supplier's Udyam Registration Certificate, which states whether the enterprise is Micro, Small or Medium and whether it is a manufacturer/service provider or a trader. Maintain a vendor master with Udyam numbers and classification. Where a valid certificate is not provided, you generally treat the vendor as outside 43B(h), but keep the correspondence on record.

PF, bonus & interest

What is the PF deposit deadline to avoid 43B disallowance?

The employer's PF/ESI contribution (clause b) must be deposited on or before the due date of filing the income-tax return (commonly 31 October for audit cases, 31 July otherwise) to be deductible in the same year. If deposited later, the deduction shifts to the year of actual deposit. The employee's share is stricter — it must go in by the PF/ESI statutory due date or it is permanently disallowed.

Is employee PF contribution covered by Section 43B?

No. The employee's share of PF/ESI deducted from salary is governed by Section 36(1)(va), not 43B. It must be deposited by the statutory due date under the PF/ESI law (typically the 15th of the next month). The Supreme Court in Checkmate Services (2022) held that late deposit results in permanent disallowance.

When is bonus to employees deductible under Section 43B?

Bonus and commission (clause c) are deductible only when actually paid, but the proviso applies: if the bonus is paid on or before the ITR due date for that year, you can claim it in the accrual year. Bonus declared in March 2026 and paid in July 2026 (before the due date) is deductible in FY 2025-26; if paid after the due date, it moves to FY 2026-27.

Is bank loan interest covered under Section 43B?

Yes. Interest payable to a bank, NBFC or public financial institution is deductible only on actual payment under clauses (d) and (e). Importantly, interest that is merely converted into a fresh loan or funded interest term loan is not treated as "actually paid," so it stays disallowed until genuinely paid in cash.

Is GST payable at year-end deductible under Section 43B?

GST, customs, excise and other statutory dues (clause a) are deductible only on payment. If the tax relating to FY 2025-26 is paid on or before the ITR due date, you can claim it in FY 2025-26; otherwise the deduction moves to the year of payment. Note GST is usually claimed on a net/exclusive basis, so 43B mainly bites where tax is routed through the P&L.

Reporting

Where is Section 43B reported in the tax audit report?

In Form 3CD, general 43B amounts (paid vs unpaid, and prior-year amounts now paid) are reported in Clause 26, while Section 43B(h) MSME details — including amounts disallowed for late payment to Micro/Small enterprises — are captured in Clause 22. Accurate reporting here prevents add-backs during assessment.

Done-for-you

Related TaxClue Services

Tax Audit (44AB)Form 3CD with correct 43B & 43B(h) MSME reporting.Explore →ITR-3 FilingBusiness & professional income returns with 43B add-backs handled.Explore →Udyam / MSME RegistrationRegister or verify supplier MSME status for 43B(h).Explore →Advance Tax SupportPlan tax after 43B disallowances impact taxable income.Explore →

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