Section 43B of the Income Tax Act falls under the head of Income from business and profession. It deals with several deductions allowed only on an “actual payment basis”. This means you can claim certain expenses or payments as deductions only when they are actually paid during the relevant financial year, irrespective of when they are accrued or incurred.
Let’s understand Section 43B of the Income Tax Act in detail and learn some of its key provisions.
Budget 2024 update
The Budget 2024 introduces a significant update to Section 43B of the Income Tax Act. The amendment focuses on ensuring timely payments to Micro, Small, and Medium Enterprises (MSMEs). The new provisions contained in Section 43B(h) are designed to:
- Enhance the working capital availability of MSMEs
and - Encourage prompt payments to these businesses
Let’s study them:
- Any amount payable to a Micro or Small Enterprise can be deducted in the same year if it is paid within the payment deadline specified in Section 15 of the MSMED Act, 2006.
- This rule applies to businesses purchasing goods or services from Micro and Small enterprises registered under the MSMED Act, 2006.
- It is essential to note that the buyer is not required to be registered under the MSMED Act to be covered by this provision.
- If payments to these enterprises are delayed beyond the 45-day limit, the deduction for these expenses will be deferred until the year the payment is made.
- This change is effective from April 1, 2024, and applies to the assessment year 2024-25 and subsequent years.
What is Section 43B?
Section 43B falls under the category of "Income from Business and Profession" and specifies that certain statutory expenses are deductible from business income only in the year they are actually paid, regardless of when the liability was incurred.
This section allows individuals to claim deductions for specific payments only in the year when those payments are actually made rather than when they are incurred or accrued. Let’s understand this concept through a hypothetical example:
- Say you run a bakery.
- You bought a new oven in October 2023 to upgrade your equipment.
- According to your books, this expense would count towards your profits for the financial year ending March 2024.
- However, if you didn't pay for the oven until the end of FY 2023-24, that is, till 31.03.2024, you cannot claim it.
- Now, let us assume that you paid for the oven in June 2025.
- In this case, you can claim this expense in the financial year ending March 2025.
Section 43B ensures that tax deductions are aligned with actual cash flows rather than just accounting entries. It is especially relevant for businesses that follow a mercantile accounting system. For those unaware, in the mercantile system, income and expenses are recorded when they are earned or incurred, regardless of when the cash actually changes hands.
Also read about: Short Term Capital Gains Tax
Deductions specified under Section 43B
The following deductions are outlined under Section 43B:
- Taxes, Duties, Cess, or Fees: Deductions for any tax, duty, cess, or fee paid under applicable laws are allowed only upon actual payment. This includes GST, customs duties, and other such levies, as well as interest on these amounts.
- Employer Contributions to Employee Benefit Funds: Employer contributions to recognised funds such as Provident Fund, superannuation, or gratuity funds are deductible if paid by the due date for deposit or before the income tax return filing deadline.
- Bonus or Commission to Employees: Deductions for bonuses or commissions are allowed only on the actual amount paid to employees, excluding dividends paid to them as shareholders.
- Interest on Borrowings: Interest paid on loans from Public Financial Institutions or State Financial Corporations is deductible, provided the payment complies with the loan’s conditions.
- Interest on Bank Loans and Advances: Interest on loans or advances from scheduled banks is also deductible if the loan conditions are met.
- Leave Encashment: Leave encashment paid by employers to employees is eligible for deduction.
- Payments to Indian Railways: Any payment to the Indian Railways is deductible when paid.
- Overdue Payments to Micro and Small Enterprises: Payments due to micro and small enterprises beyond the time limit specified under Section 15 of the MSMED Act are deductible upon actual payment.
Additionally, if the interest mentioned in clauses 4 and 5 is converted into a loan, it is not considered a deductible payment. Therefore, businesses using the mercantile accounting method should carefully follow these provisions to ensure eligibility for these deductions.
Also read about: Income Tax Slab for FY 2024-25
Payments under Section 43B
Majorly, Section 43B of the Income Tax Act covers seven types of payments, as mentioned above. Now, let’s have a detailed understanding of each of them:
Contributions made towards employee benefits
This includes amounts paid by employers towards employee welfare funds such as:
- Gratuity
- Provident fund
- Superannuation fund
Tax payments
Payments made by the assessee in the form of taxes, cess, or duty to the government qualify under Section 43B. This also includes interest paid on these taxes.
Bonus or commission
Money paid to employees as bonuses or commissions for their services is covered. However, dividends paid to shareholders are not included.
Interest payable on loans and advances
Interest paid on loans and advances from “scheduled banks” is deductible, provided the loans were taken under specific terms and conditions of the concerning agreement.
Leave encashment
Payments made to employees for encashing their leave balance are included under Section 43B of the Income Tax Act.
Payments to Indian Railways
Amounts paid to the Indian Railways can be claimed as expenses. However, to qualify, the payment must be made from the fiscal year of 2016-17. If payments are delayed beyond the return filing deadline, they will be allowed as a deduction in the year of actual payment.
Interest payable on loans
Interest on loans from state financial corporations or public financial institutions is deductible, provided the loans comply with prescribed guidelines.
Additionally,
Under the Sales Tax Act, any sales tax that is deferred under an incentive scheme is considered as paid for the purposes of Section 43B.
Also, if interest income (mentioned in clauses 4 and 5) is converted into a loan, this conversion does not qualify as an interest payment eligible for deduction.
Also read about: What is Section 80C
Exceptions under Section 43B of the Income Tax Act
To claim deductions under Section 43B of the Income Tax Act, taxpayers must meet the following conditions:
- The taxpayer must use the mercantile system of accounting.
- All relevant expenses must be paid either before or by the due date for filing income tax returns.
- Taxpayers must provide substantial proof of these payments when filing their income tax returns.
Additionally, taxpayers should be aware that converting interest liabilities into share capital is not eligible for deductions under Section 43B. Moreover, any payments made on or before the due date for filing returns as specified in Section 139(1) of the Act are exempt from the conditions of Section 43B.
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What are the conditions for claiming deductions u/s 43B?
Sec 43B of the Income Tax Act provides several conditions that must be met to qualify for deductions. Let’s check them out:
Actual payment
- Deductions are allowed only for payments that have actually been made within the year, not merely accrued.
- For example:
- Say an employer announces a bonus
- However, the bonus is paid in the next financial year
- In such a case, the bonus cannot be claimed as a deduction in the year it was announced
- The employer can claim the bonus as a business expense u/s 43B only when it is actually paid
Payment before the due date
- The payment must be made on or before the specified due date.
- For example:
- Contributions to the Employees' State Insurance (ESI) must be paid by the 15th of each month to qualify for a deduction
Mandatory payment
- The payment must be mandatory, not optional.
- For example:
- Any commission paid to an employee must be part of the employment contract to be eligible for deduction
Documentary evidence
- The payment must be documented.
- Cash payments are not eligible for deduction.
- Also, proper written documentation is required to support the deduction claim.
Also read about: Long Term Capital Gains Tax
What are the expenses covered under Section 43B?
Section 43B of the Income Tax Act mandates that certain expenses can only be claimed as deductions if they are paid within specific timelines. These expenses include:
- Contributions to employee welfare funds: Employers can deduct contributions to employee Provident Fund (PF), Employees' State Insurance (ESI), and other welfare funds only when they are actually paid.
- Statutory dues: Taxes, cesses, duties, or fees can be claimed as deductions only when they are paid in full.
- Bonus and commission: Bonus and commission payments to employees are deductible under Section 43B, but only if they are made before the income tax return filing deadline.
- Leave encashment: Payments made to employees for unutilized leave balances are deductible, subject to the condition that they are paid before the income tax return filing deadline.
- Interest on loans: Interest paid on loans from Scheduled Banks, Public Financial Institutions, State Financial Corporations, or State Industrial Investment Corporations is deductible if paid by the income tax return filing deadline.
- Payments to Indian Railways: Amounts owed to Indian Railways for the use of their assets can be claimed as deductions.
- Payments to micro or small enterprises: Payments made to Micro or Small Enterprises are deductible in the same year only if they are paid within the timeline specified by the Micro, Small and Medium Enterprises Development Act, 2006. This provision was added by the Finance Act, 2023.
Also read about: What is a Hindu Undivided Family
Effect of Section 43B on tax liability
Section 43B of the Income Tax Act mandates the timely payment of certain expenses to be eligible for deduction in the relevant assessment year. Non-compliance can lead to significant tax implications. For instance, a failure to deposit Provident Fund contributions by the due date will result in disallowance of the corresponding deduction. This directly increases the taxable income of the employer, potentially leading to higher tax liabilities.
Similarly, if interest payments on business loans are not made within the stipulated timeframe, the deduction claim for such interest will be denied. This can substantially elevate the taxable income of the individual or business, resulting in increased tax burdens. To mitigate these adverse consequences, it is imperative for businesses and individuals to adhere to the timelines specified under Section 43B for the timely payment of all relevant expenses.
Also read about: What is direct tax code
Conclusion
Section 43B of the Income Tax Act ensures that certain business expenses are deductible only when they are “actually paid”. Some common examples of these expenses are contributions to employee welfare funds, taxes, bonuses, interest on loans, and more.
Through this section, the government promotes timely payments and accurate financial reporting. The 2024 Budget introduced Sec 43B(h), which mandates prompt payments to MSMEs to enhance their working capital. However, to claim eligible deductions, taxpayers must provide proper documentation and ensure payments are made by the due date.
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