Section 43B — Deductions Allowed Only on Actual Payment
Updated: 3 June 2026 | Income-tax Act 2025 | Includes 43B(h) MSME Rule
Section 43B disallows deductions for certain expenses unless actually paid — not just provisioned or accrued. Covers PF/ESI contributions, bonus, govt dues, bank interest, and from FY 2023-24, MSME payments (Section 43B(h): pay within 45 days or lose the deduction that year).
45 Days
MSME payment rule (43B(h)): Pay your Micro/Small enterprise vendors within 45 days or the expense is disallowed.
Applicable from FY 2023-24. Medium enterprises and unregistered suppliers not covered.
Applicable from FY 2023-24. Medium enterprises and unregistered suppliers not covered.
Section 43B — Items Covered
| Sub-section | Expense Type | Payment Deadline | If Not Paid by Deadline |
|---|---|---|---|
| 43B(a) | Tax, duty, cess, fee payable to government | Before ITR due date | Disallowed; allowed in year of payment |
| 43B(b) | Employer PF/ESI/gratuity fund contribution | Before ITR due date | Disallowed; allowed in year of payment |
| 43B(c) | Bonus or commission payable to employees | Before ITR due date | Disallowed; allowed in year of payment |
| 43B(d) | Interest on loans from public financial institutions | Before ITR due date | Disallowed; allowed in year of payment |
| 43B(e) | Interest on loans from cooperative banks | Before ITR due date | Disallowed; allowed in year of payment |
| 43B(f) | Leave encashment paid to employees | Actual payment to employee | Disallowed; allowed in year of payment |
| 43B(h) | Payments to Micro & Small enterprises | 15 days (no agreement) / 45 days (with agreement) | Disallowed; allowed in year of payment |
43B(h) MSME Payment Rule — Details
| Scenario | Payment Timeline | Tax Consequence |
|---|---|---|
| No written agreement with MSME | Within 15 days of acceptance/delivery | Paid within 15 days → full deduction |
| Written agreement with MSME | Within agreed time, max 45 days | Paid within 45 days → full deduction |
| Paid after deadline, before ITR due date (July 31) | After 45 days but before July 31 | Allowed in same FY |
| Paid after ITR due date | After July 31 of AY | Disallowed FY of accrual; allowed FY of payment |
| Payment to Medium enterprise | Any time | 43B(h) not applicable — normal accrual rules |
| Payment to unregistered supplier | Any time | 43B(h) not applicable |
Frequently Asked Questions
What is Section 43B and which expenses are covered?
Section 43B of the Income-tax Act provides that certain business expenses are deductible ONLY if actually paid before the due date of filing the ITR (not just accrued/booked). Expenses covered: (a) Taxes/duties/cess/fee paid to govt; (b) Employer contribution to PF, ESI, gratuity fund, leave encashment fund; (c) Bonus/commission paid to employees; (d) Interest on borrowing from public financial institutions or state financial corporations; (e) Interest on loans from cooperative banks; (f) Leave encashment (actual payment to employee); (g) Payments to MSMEs (added from FY 2023-24). If not paid by ITR due date → deduction disallowed in that FY; allowed in FY of actual payment.
What is the Section 43B MSME payment rule (43B(h))?
Section 43B(h) — effective from 1 April 2023 (FY 2023-24): Payments to Micro and Small Enterprises (registered under MSMED Act 2006) must be made within the time specified in the MSMED Act, otherwise disallowed. MSMED Act payment timelines: If no written agreement — within 15 days of delivery. If written agreement — within 45 days (max under MSMED Act Section 15). If payment is made after the deadline but before ITR filing date: allowed in that FY. If paid after ITR filing date: allowed only in the FY of actual payment. Medium enterprises and unregistered suppliers: NOT covered by 43B(h). Buyer must check MSME registration on Udyam portal.
Can deductions disallowed under Section 43B be claimed later?
Yes — deductions disallowed under 43B are NOT permanently lost. They are allowable in the year of actual payment. Example: Employer PF contribution for March 2025 paid on 25 September 2025 (after July 31, 2025 ITR due date): Disallowed in FY 2024-25 → allowed in FY 2025-26 (year of actual payment). This creates a timing difference, not permanent disallowance. Important: The payment must be actually made (not just journal entry or TDS deduction). Gratuity/leave encashment: Only allowed when actually paid to employee or credited to an approved fund — not merely provisioned.
Does Section 43B apply to accrual basis taxpayers only?
Section 43B overrides the accrual method — it applies to taxpayers who follow the mercantile (accrual) system of accounting. Cash basis taxpayers: Not affected as they deduct expenses only when paid. The section was introduced because accrual-basis businesses were claiming deductions on provisioned expenses (like PF, gratuity, duty) without actually paying — this was causing revenue leakage. Salary itself is not covered by 43B — it is deductible on accrual basis. Only the specific categories (PF contribution, bonus, MSME payments, govt dues, bank loan interest) are covered.
How to comply with Section 43B for MSME payments?
Compliance steps: (1) Identify all suppliers — check MSME/Udyam registration (Micro or Small enterprise). (2) Note delivery date/invoice date for each transaction. (3) Check written agreement — if no agreement, pay within 15 days; if agreement exists, pay within agreed time (max 45 days). (4) Maintain payment records: date of goods receipt, invoice date, payment date. (5) Reconcile at year-end: all MSME invoices pending as on March 31 and not paid by July 31 → disallow in P&L for tax. (6) Report in Form 3CD (tax audit report) — Clause 26 requires reporting of 43B items. Practical risk: Large companies buying from MSME vendors face tax disallowance if payment system is not aligned.
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