Section 43B of Income Tax Act says certain business expenses are deductible only in the year you actually pay them, even if your books record them earlier on an accrual basis. The list includes taxes and duties, employer contributions to staff funds, bonus, leave encashment, some loan interest and, since FY 2023-24, dues to micro and small suppliers.
For most items there is relief: payment made by the due date of the return still counts for the year of the expense. The MSME clause, 43B(h), has no such relief. What follows sets out the FY 2025-26 position, which falls under the 1961 Act. From tax year 2026-27, the same rule sits in section 37 of the 2025 Act. More business rules are on the deductions hub.
Quick facts
What it does
Allows listed expenses only when paidGrace for most items
Paid by the return due date under section 139(1)43B(h)
MSME dues: allowed only when paid, unless paid within the MSMED Act time limitMSMED Act limit
15 days without a written agreement, 45 days at most with oneWho it affects
Businesses and professionals keeping accounts on accrual basisAudit reporting
Tax audit report, Form 3CDUnder the 2025 Act
Section 37
What section 43B of Income Tax Act covers
| Clause | Expense | Can payment by return due date save it? |
|---|---|---|
| (a) | Tax, duty, cess or fee under any law, such as property tax or professional tax | Yes |
| (b) | Employer contribution to provident fund, superannuation, gratuity or other staff welfare fund | Yes |
| (c) | Bonus or commission to employees | Yes |
| (d), (da), (e) | Interest on loans from public financial institutions, state financial corporations, NBFCs and scheduled banks | Yes |
| (f) | Leave encashment paid to employees | Yes |
| (g) | Payments to the railways for use of railway assets | Yes |
| (h) | Sums owed to a micro or small enterprise beyond the MSMED Act time limit | No |
Interest that the lender converts into a new loan is not treated as paid. It is allowed only when you actually pay off that converted amount.
How the return due date relief works
The proviso to the section gives breathing room. If a liability for FY 2025-26 is paid on or before the due date of the return for AY 2026-27, the deduction stays in FY 2025-26. Pay after that date and the deduction moves to the year of payment. Keep the challan or bank proof with the date, because the tax auditor checks it.
Facts. A furniture dealer who is not under audit, with a return due date of 31 August for AY 2026-27, books two liabilities on 31 March of FY 2025-26: staff bonus of ₹3,00,000 and shop property tax of ₹40,000.
Bonus. Paid on 10 July, before the due date. Deduction stays in FY 2025-26: ₹3,00,000.
Property tax. Paid on 20 September, after the due date. It is added back in FY 2025-26 and claimed in tax year 2026-27, the year of payment.
Effect. Taxable profit for FY 2025-26 rises by ₹40,000. If the dealer pays 30% tax plus cess, that is ₹12,480 more tax now, recovered later through the deduction in the next year.
Section 43B(h) of Income Tax Act: payments to MSME suppliers
Clause (h) applies from FY 2023-24. It covers amounts you owe to a supplier who is a micro or small enterprise registered under the MSMED Act. Medium enterprises are not covered. If you pay within the time allowed by section 15 of the MSMED Act, the expense is allowed normally. If you pay later, it is allowed only in the year of actual payment, and the return due date grace does not help.
| Arrangement with the supplier | Pay within |
|---|---|
| No written agreement | 15 days from acceptance of the goods or services |
| Written agreement on credit period | The agreed days, but never more than 45 days |
Facts. A garment maker buys fabric worth ₹6,00,000 on 10 February from a registered micro enterprise, with a written 45 day credit term. The 45th day falls on 27 March.
Paid on 20 March. Within 45 days. Expense allowed in FY 2025-26.
Paid on 15 April instead. Late. The ₹6,00,000 is disallowed for FY 2025-26 and allowed in tax year 2026-27, even though payment came before the return due date.
Suppliers that only trade, rather than manufacture or provide services, are widely treated as outside this clause; check the supplier's registration and take advice where it is unclear.
Who needs to watch 43B and who can relax
The rule bites businesses that keep accounts on the mercantile basis, which includes every company and most firms. A trader under the 44AD presumptive scheme declares profit as a share of turnover, so individual expenses are not separately claimed and 43B(h) does not change the figure. Professionals keeping cash-basis books already claim only what they pay.
Employees' own PF and ESI contributions deducted from salary are a different matter. They are treated as the employer's income unless deposited by the due date under the PF or ESI law, and the Supreme Court has held that the return due date relief does not save them.
Section 43B in the tax audit and under the 2025 Act
A tax auditor reports 43B items in Form 3CD, listing what was unpaid at year end and what was paid before the return date. For audit cases, see tax audit under 44AB.
| Aspect | Old law, FY 2025-26 | New law, tax year 2026-27 |
|---|---|---|
| Section | 43B | 37 |
| MSME clause | 43B(h) | Carried into section 37 |
| Return due date grace | Yes, except MSME dues | Same pattern |
Common 43B mistakes
| Mistake | Correction |
|---|---|
| Assuming MSME dues paid before the return date are safe | 43B(h) needs payment within 15 or 45 days, or the deduction shifts |
| Not checking whether a supplier is registered as micro or small | Ask for the Udyam registration and keep it on file |
| Claiming interest the bank converted into a fresh loan | Claim it only when the converted amount is repaid |
| Depositing employees' PF share late and relying on the return date | Deposit by the PF due date; the grace does not apply |
This summary of the actual payment rule is for general understanding only. Amendments and court rulings shift the details, so have a chartered accountant check your figures, or verify them on the official portal.
Sources we checked
- Income-tax Act, 1961, section 43B
- Micro, Small and Medium Enterprises Development Act, section 15
- Income-tax Act, 2025, section 37
Frequently asked questions
How would you explain 43B of Income Tax Act in simple words?
It is a rule that some expenses, such as taxes, bonus, PF contributions and bank interest, are allowed only when you actually pay them, not when you merely book them.
What is 43BH of Income Tax Act?
Clause 43B(h) disallows amounts owed to micro and small enterprises if they are not paid within the MSMED Act time limit of 15 days, or up to 45 days with a written agreement. The deduction is then allowed in the year of payment.
Does 43B(h) apply to medium enterprises?
No. It covers only micro and small enterprises registered under the MSMED Act.
Does section 43B apply under the presumptive scheme of 44AD?
Under 44AD the profit is a fixed share of turnover, so individual expenses are not claimed and the 43B disallowance does not change the profit you declare.
What is the new section for 43B under the 2025 Act?
Section 37 of the Income-tax Act, 2025 holds the payment rule for tax year 2026-27 onward.