Section 43B Expenses: Deduction on Actual Payment Basis (2025)

Section 43B of the Income-tax Act 2025 mandates that certain business expenses — including taxes, PF contributions, bonus, and bank interest — are deductible only when actually paid, not when accrued. The critical addition is Section 43B(h): payments to Micro and Small enterprises must be made within 45 days (with agreement) or 15 days (without) — otherwise the deduction is disallowed until paid.

45 Days

Maximum time to pay a Micro or Small enterprise (MSME) supplier under Section 43B(h) when a written agreement exists — else the deduction is disallowed in that year and moved to the year of actual payment.

What Is Section 43B?

Section 43B is a special provision that overrides the mercantile system of accounting. Normally, businesses deduct expenses when they accrue (are incurred), even if not paid. Section 43B says: for the listed expenses, you get the deduction only in the year you actually pay, regardless of when you book them.

The deduction is allowed in the year of actual payment — even if it falls in a later year. There is no permanent disallowance (except for employee PF/ESI contributions deposited after the statutory due date).

Expenses Covered Under Section 43B

Clause	Expense Type	Deductible When	Key Notes
(a)	Taxes, duties, cess, fees payable to Government	Actual payment	GST, customs duty, excise duty, etc. — all deductible on payment
(b)	Employer contribution to PF, ESI, pension fund, gratuity fund	Actual deposit	Must be deposited by ITR due date to claim in same year
(c)	Bonus or commission to employees	Actual payment	Pay before ITR due date to get deduction in same FY
(d)	Interest on borrowing from banks / financial institutions	Actual payment (or accrual for MSMEs receiving interest)	For MSME borrowers: accrual basis allowed since Budget 2023
(e)	Leave encashment to employees	Actual payment	Accrued liability not deductible until paid out
(f)	Sum payable to Indian Railways for use of assets	Actual payment	Rail freight and hire charges
(h) NEW	Payments to Micro and Small enterprises (MSME)	Within 45 days (agreement) or 15 days (no agreement)	Effective AY 2024-25; Medium enterprises not covered

Section 43B(h): The MSME Payment Deadline Rule

What changed with Budget 2023: A new clause (h) was added to Section 43B, effective from Assessment Year 2024-25 (FY 2023-24 onwards). Any sum payable to a Micro or Small enterprise must be paid within the time limit set under Section 15 of the MSMED Act 2006 — otherwise it is disallowed in that year.

Situation	Payment Deadline	Consequence if Missed
Written agreement with MSME supplier	Within 45 days of delivery/service	Deduction disallowed; shifts to year of actual payment
No written agreement with MSME supplier	Within 15 days of delivery/service	Deduction disallowed; shifts to year of actual payment
Payment to Medium enterprise	Not covered by 43B(h)	No restriction; normal accrual deduction applies
Payment to Large/Non-MSME supplier	Not covered by 43B(h)	Normal accrual deduction applies

How to Identify MSME Suppliers

Ask your supplier for their Udyam Registration Certificate. Micro enterprises have investment up to ₹1 crore and turnover up to ₹5 crore. Small enterprises have investment up to ₹10 crore and turnover up to ₹50 crore. Without the certificate, treat the supplier as non-MSME for 43B(h) — though misclassification risk lies with you.

PF / ESI Deposit: Special Rule

For employer contributions to PF, ESI, and other welfare funds (clause b), the deduction is allowed if paid before the ITR due date. However, employee contributions (TDS from salary and deposited to PF/ESI) are governed by a stricter rule post the Supreme Court judgment in Checkmate Services Pvt Ltd v. CIT (2022): employee's share deposited after the statutory due date (15th/21st of next month) is permanently disallowed — not merely deferred.

Section 43B at a Glance: Timeline for Deduction

Scenario	Deduction in FY 2024-25?
PF deposited on 10 Apr 2025 (within ITR due date)	Yes
PF deposited on 5 Nov 2025 (after ITR due date of 31 Oct)	No — shifts to FY 2025-26
Bonus declared Mar 2025, paid Jun 2025 (before ITR due date)	Yes
Bonus declared Mar 2025, paid Dec 2025 (after ITR due date)	No — shifts to FY 2025-26
MSME payment — 20-day delay, no agreement (15-day limit)	No — shifts to year paid
GST paid before ITR filing	Yes

Frequently Asked Questions

What is Section 43B of the Income-tax Act 2025?

Section 43B lists specific deductions that are allowed only on actual payment basis — not on accrual. Even if an expense is debited in your P&L account, the deduction is available only in the year you actually make the payment. Covered items include taxes, duties, cess, employer contributions to PF/ESI/pension funds, and interest to banks and financial institutions. If payment is made before the due date of filing the ITR, the deduction shifts to the year of payment.

What is the MSME payment clause under Section 43B(h)?

Section 43B(h), inserted by the Finance Act 2023 effective from AY 2024-25, disallows deduction for any sum payable to a Micro or Small enterprise (MSME) if payment is not made within the time prescribed under the MSMED Act. The prescribed period is 45 days where a written agreement exists, or 15 days where there is no agreement. If you miss the deadline, the deduction is deferred to the year in which you actually pay — even if it was accrued in the current year. Medium enterprises and large suppliers are not covered by this clause.

Is salary or advance to employees covered under Section 43B?

Salary paid to employees is not listed under Section 43B — salary is deductible on accrual basis under normal accounting principles (Section 37). However, employer contributions to Provident Fund, ESI, gratuity fund, pension fund, and other approved funds ARE covered under Section 43B and are deductible only when actually deposited. If PF contributions are deposited late, they are disallowed in the current year and allowed in the year of actual deposit.

When is the bonus or commission to employees deductible under Section 43B?

Bonus and commission payable to employees are covered under Section 43B. They are deductible only when actually paid. If bonus is declared in March 2025 but paid in August 2025 (after the ITR due date), it will be deductible in FY 2025-26 (AY 2026-27) — not FY 2024-25. To claim the deduction in the current year, payment must be made on or before the due date of furnishing the return of income for that year.

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

Employer contributions to Provident Fund (PF), ESI, and other employee welfare funds must be deposited by the due date of filing the income tax return (typically 31 October for tax audit cases, 31 July for others) to be deductible in the same year. If deposited after the ITR due date, the deduction is shifted to the year of actual payment. Note: the Supreme Court in Checkmate Services (2022) held that employee contributions deposited late are not deductible at all under Section 43B — they are permanently disallowed if deposited after the statutory due date under PF/ESI law.

Last updated: 3 June 2026. This page is for informational purposes only and does not constitute professional tax or legal advice. Consult a CA for your specific situation. All provisions refer to the Income-tax Act 2025.

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