If you are running a business or managing professional finances, you've probably come across Section 43B of the Income Tax Act. But what does it really mean?
In simple terms, Section 43B says that certain expenses can only be claimed as deductions when you actually pay them—not just when they’re recorded in your books. So, even if an expense shows up in your accounts, it won’t reduce your tax liability unless you’ve actually cleared the payment within the relevant financial year.
This rule helps ensure that your tax benefits match your real cash outflows—not just accounting entries. And with the recent Budget 2024 update, this section has become even more important for businesses working with MSMEs. Let’s break it all down, starting with what’s new.
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Budget 2024 update
In Budget 2024, Section 43B saw a key addition: Clause (h). This update is designed to support Micro, Small, and Medium Enterprises (MSMEs a sector that often struggles with delayed payments.
So, what’s the big change?
Under the new clause:
Any amount payable to a Micro or Small Enterprise can now be deducted in the same year only if it’s paid within the deadline mentioned under Section 15 of the MSMED Act, 2006.
If the payment is delayed beyond the allowed 45 days, you can’t claim the deduction that year. It will only be allowed in the year the payment is finally made.
This applies to all businesses buying goods or services from eligible MSMEs—even if the buyer themselves is not registered under the MSMED Act.
This provision is now effective from 1 April 2024, and applies to the Assessment Year 2024–25 and onwards. It’s a clear push towards ensuring that MSMEs get paid on time—while also helping buyers plan their tax deductions better.
What is Section 43B?
Section 43B falls under the umbrella of "Income from Business and Profession" and plays a key role in how and when you can claim certain deductions.
Here’s the gist:
This section allows you to claim deductions only when actual payment is made, regardless of when the expense was incurred. So, even if an expense shows up in your accounting books, it won’t be deductible unless you actually pay it by the relevant deadline.
Let us look at an example:
Imagine you run a bakery and buy a new oven in October 2023. On paper, this shows up in your FY 2023–24 books. But you only pay for it in June 2025. As per Section 43B, you can claim the expense only in the financial year ending March 2025 when the payment was actually made.
This rule is especially relevant for businesses using the mercantile accounting system, where expenses and income are usually recorded when they’re incurred, not when money changes hands. Section 43B makes sure your tax deductions are based on actual outflows, not just accounting entries.
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Deductions specified under Section 43B
Section 43B clearly lists the types of payments that qualify for deductions only when they are actually paid no matter when they were recorded in the books.
Here’s a quick breakdown of what counts:
Taxes, duties, cess, or fees: These include amounts like GST, customs duty, or any interest on such payments. You can claim them as deductions only if you've actually paid them.
Employer contributions to employee funds: Contributions to employee welfare schemes such as Provident Fund, Gratuity, or Superannuation Funds are deductible only if paid by the due date—either for deposit or for filing your income tax return.
Bonus or commission to employees: If you’re giving out bonuses or commissions, you can claim the deduction only on the amount actually paid. Dividends given to employees in their role as shareholders are not covered.
Interest on borrowings: Whether it's from a public financial institution or a state financial corporation, the interest is deductible only if paid in accordance with the loan’s terms.
Interest on bank loans and advances: Same rule here—the interest must be actually paid to qualify.
Leave encashment: If you’re paying employees for unused leave, this qualifies for deduction under Section 43B.
Payments to Indian Railways: Any dues to Indian Railways are also deductible—but again, only when paid.
Overdue payments to MSMEs: From FY 2023–24 onwards, any delayed payments to micro or small enterprises are only deductible in the year of payment, not accrual.
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Payments under Section 43B
Now let’s take a deeper look at each of the major payments covered under this section.
1. Employee benefit contributions
Employers often contribute to welfare schemes such as:
Provident Fund (PF)
Gratuity
Superannuation fund
To claim deductions, you must ensure that payments to these funds are made either before the income tax return filing date or by their respective due dates.
2. Tax payments
This includes any taxes, cess, or duties paid to the government—such as GST, income tax, or import duties. These are only deductible if they are paid in full.
3. Bonus or commission
Bonuses and commissions paid to employees for their services are covered. However, any dividend-type payment to employees in their role as shareholders won’t qualify.
4. Interest on loans and advances
Interest on borrowings from scheduled banks can be deducted if the terms of the loan agreement are followed and payments are actually made.
5. Leave encashment
If your employee cashes in unused leave, you can deduct that payment provided it’s paid in the same financial year.
6. Payments to Indian Railways
If you're using railway services and making payments to Indian Railways, these qualify again, only on actual payment.
7. Interest on loans from financial institutions
This refers to loans from institutions like State Financial Corporations. Interest paid is deductible if made as per the loan terms.
Also worth noting:
Deferred sales tax under government incentive schemes is treated as paid under Section 43B.
If any interest (like in clause 4 or 5 above) is converted into a loan, it doesn’t qualify for deduction.
Exceptions under Section 43B of the Income Tax Act
While Section 43B encourages prompt payment, it also recognises that sometimes things get delayed. Here are the exceptions that allow some flexibility—provided you meet specific conditions.
1. You follow the mercantile system
Only businesses using the mercantile method of accounting can claim deductions under Section 43B.
2. You pay before the ITR due date
If the payment is made before the due date of filing your income tax return under Section 139(1), then you're still eligible to claim the deduction even if the payment wasn’t made by the financial year-end.
3. Proof is a must
You’ll need valid documents to support the fact that the payment was actually made. Deductions won’t be allowed if there’s no paperwork to back it.
Also, if you convert a payment such as an interest liability into share capital, that won’t qualify as an actual payment under this section.
What are the conditions for claiming deductions u/s 43B?
To claim deductions under Section 43B, you need to meet a few simple but crucial conditions. Let’s break them down:
1. Actual payment
You must actually pay the expense during the financial year to claim it as a deduction. Merely recording the expense in your books won’t do.
Example:
Say you announce a bonus to your staff in March 2024, but end up paying it in June 2024. You can’t claim it as a deduction for FY 2023–24. You’ll have to wait and claim it in FY 2024–25—when it’s actually paid.
2. Payment before the due date
If you haven’t paid the expense by the end of the financial year, you can still claim the deduction—as long as it’s paid before the deadline for filing your income tax return (as per Section 139(1)).
Example:
If you’re contributing to the Employees’ State Insurance (ESI), make sure the payment is made by the 15th of the following month. Otherwise, you may miss out on the deduction.
3. Mandatory payment
Only compulsory payments qualify. Optional or discretionary payments don’t count.
Example:
Let’s say you pay a commission to an employee, but it’s not mentioned in the employment contract. That commission may not qualify as a deductible business expense.
4. Proper documentation
You need to maintain clear proof of the actual payment. Without documentation, your deduction claim can be rejected. Also, cash payments are not eligible for deduction under Section 43B.
What are the expenses covered under Section 43B?
Now let’s summarise the key types of expenses that fall under the purview of Section 43B. These are only allowed as deductions if they’re paid within the specified timelines.
1. Employee welfare fund contributions
This includes:
Provident Fund (PF)
Employees' State Insurance (ESI)
Superannuation and other welfare funds
You can only claim deductions for these if the payments are actually made before the deadline.
2. Statutory dues
Any taxes, duties, fees, or cess—like GST or income tax—must be paid fully to qualify for deduction.
3. Bonus and commission
Bonuses and commissions paid to employees are deductible only if paid by the ITR filing deadline. If not, they’ll be disallowed for that year.
4. Leave encashment
If you pay your employees for unutilised leave, that amount can be claimed as a deduction—again, only if paid before the return filing due date.
5. Interest on loans
If you’ve taken loans from Scheduled Banks or Public Financial Institutions, any interest you pay is deductible as long as it’s paid on time.
6. Payments to Indian Railways
This includes dues paid for services used. If payments are delayed, you can only claim them in the year you actually pay them.
7. Payments to MSMEs
As per the 2023 Finance Act, payments made to registered Micro or Small Enterprises must be completed within the timelines specified under the MSMED Act. Otherwise, you’ll only be able to claim the deduction in the year the payment is actually made.
Effect of Section 43B on tax liability
Section 43B is a wake-up call for businesses to pay their dues on time. Failing to do so can increase your taxable income and your final tax burden.
For example:
If you miss depositing the Provident Fund contribution for employees by the deadline, you can’t claim it as a deduction. That amount then adds to your taxable income—resulting in a higher tax liability.
Similarly, if you delay paying interest on loans or advances, that interest won’t be deductible either. Again, your taxable income goes up, and so does your tax bill.
To avoid this, it's important to follow Section 43B’s timelines closely—especially for:
Tax payments
Employee contributions
Interest payments
Dues to MSMEs
By ensuring these payments are made on time, you not only stay compliant but also reduce your overall tax outgo.
Conclusion
Section 43B of the Income Tax Act is all about timing. It ensures that certain business expenses—like employee welfare contributions, taxes, bonuses, loan interest, and more—are deducted only when they’re actually paid. This approach encourages transparency and prevents businesses from claiming deductions for amounts they haven’t yet settled.
The 2024 Budget has made Section 43B even more relevant by introducing Clause (h), which mandates prompt payments to MSMEs. This move is expected to improve cash flow for small businesses and make India’s business ecosystem more supportive and fairer. When deductions are denied due to missed deadlines, it not only increases your tax bill but disrupts your financial planning. Aligning tax-saving strategies with investment planning can ease cash flow stress over time. Explore smart mutual fund strategies today
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