Section 43B of Income Tax Act

Section 43B of the Income Tax Act outlines specific expenses that can be claimed as deductions from business income only upon actual payment, not just when the liability is incurred.
Section 43B of Income Tax Act
3 min
28-June-2024<br><br>

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.

What is Section 43B?

Section 43B of the Income Tax Act focuses on how certain payments can be treated as “expenses” and reduced from the income computed under the head “Profits and gains from the business profession” (PGBP).

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.

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.

Also read about: Short Term Capital Gains Tax

Deductions specified under Section 43B

As mentioned above, Section 43B of the Income Tax Act of 1961 specifies that certain expenses can be deducted only in the year they are actually paid. Let us look at the seven types of such expenses or payments:

  1. Employee welfare contributions
  2. Taxes and duties
  3. Employee bonuses
  4. Interest on certain loans
  5. Leave encashment
  6. Payments to Indian Railways
  7. Interest on loans from state or public financial institutions

Taxpayers must note that they can reduce the above seven expenses only in the year when they are actually paid. This means dues or advances are disallowed in the year these expenses are incurred.

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

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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Frequently asked questions

What is Section 43B as per the Income Tax Act?
Section 43B of the Income Tax Act relates to income computed under the head PGBP. It mandates that certain business expenses are deductible only in the year they are actually paid.
What is disallowed under section 43B?
Under Section 43B of the Income Tax Act, payments made after the due date of filing returns under Section 139(1) of the Act are disallowed.
What is the amendment to Section 43B?
The budget 2024 made a significant amendment to the Sec 43 by introducing new provisions contained u/s 43B(h). As per them, any amount payable to an MSME can be allowed deductions in the same year if it is paid within the payment deadline specified in Section 15 of the MSMED Act, 2006
What is 43B disallowance for deferred tax?
As per Section 43B, deductions are not allowed in respect of deferred tax liabilities.
What is the time limit for 43B?
The time limit for deductions under Section 43B of the Income Tax Act is the due date of filing the income tax return for the relevant assessment year.
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Disclaimer

Bajaj Finance Limited (“BFL”) is an NBFC offering loans, deposits and third-party wealth management products.

The information contained in this article is for general informational purposes only and does not constitute any financial advice. The content herein has been prepared by BFL on the basis of publicly available information, internal sources and other third-party sources believed to be reliable. However, BFL cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. 

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