12 September 2026 · Ruhu AI

Section 43B(h): The MSME 45-Day Payment Rule That Moves Your Deduction

Since Finance Act 2023 (effective from assessment year 2024-25), amounts payable to micro and small enterprises carry a tax consequence most businesses discover only at audit time: pay late, and your deduction moves. Section 43B(h) of the Income-tax Act allows the expense only on actual payment when you have crossed the time limit of Section 15 of the MSMED Act.

Who is covered, and who is not

Covered: suppliers registered as MICRO or SMALL enterprises (the predominant professional view is that Udyam registration is required for MSMED supplier status). From 1 April 2025 the revised limits classify micro as investment up to Rs 2.5 crore and turnover up to Rs 10 crore, and small as investment up to Rs 25 crore and turnover up to Rs 100 crore.
Not covered: medium enterprises. The section reaches micro and small only.
Also generally outside: traders, who are registered on Udyam for limited benefits and are not suppliers of goods manufactured or services rendered in the MSMED sense for this purpose.

The first step is simple: get Udyam certificates from your vendors and tag their status in your accounting system. Until vendors are tagged, your 43B(h) exposure is unknown, not nil.

The time limit is 15 days, not 45

Section 15 of the MSMED Act sets the outer limits: 15 days from acceptance (or deemed acceptance) where there is no written agreement, and up to 45 days where a written agreement specifies a credit period. The 45-day figure everyone quotes is the maximum with an agreement, not the default. If your purchase orders and vendor agreements are silent on credit period, the clock is 15 days.

How the disallowance actually works

The mechanics decide the outcome:

Paid within the Section 15 limit: deductible in the year of accrual. Normal.
Paid late, but within the same financial year: still deductible in that year. 43B(h) tests actual payment, and payment happened in the year.
Outstanding at year end, beyond the limit: the deduction is denied for the accrual year and allowed in the year you actually pay. Unlike other clauses of Section 43B, there is no grace up to the return-filing due date for this clause.

So the year-end position is what bites: every micro or small vendor invoice that is past its Section 15 deadline and unpaid on 31 March gets added back to your taxable income for that year.

The interest nobody talks about

Independently of income tax, Section 16 of the MSMED Act charges compound interest, compounded monthly, at three times the RBI bank rate on delayed payments to micro and small enterprises. And under Section 23 of the MSMED Act, that interest is not deductible for income tax. It is a real cost with no tax shield.

The new Income-tax Act does not change this

The Income-tax Act, 2025 replaced the 1961 Act from 1 April 2026. Returns for FY 2025-26 and earlier, and any assessment of those years, continue to run on Section 43B(h) of the 1961 Act. From tax year 2026-27 the same actual-payment rule for micro and small enterprise dues continues in Section 37 of the 2025 Act. The tests, the Section 15 MSMED time limits and the consequences described here are unchanged; only the citation on the computation changes.

A year-end checklist

Pull a creditors ageing as on 31 March filtered to Udyam-tagged micro and small vendors.
For each overdue balance, compute the Section 15 deadline (15 days, or the agreed period capped at 45).
Anything unpaid beyond the deadline: add back under 43B(h), claim it in the payment year.
Also list invoices still WITHIN their 15/45-day window on 31 March, and before finalising the computation confirm each was actually paid within its deadline. One that slipped after year-end belongs in the add-back too; the return timeline gives you room to check.
Clear MSME dues before 31 March wherever cash allows. The deduction, the interest exposure and the vendor relationship all point the same way.

Frequently asked questions

Does 43B(h) apply to amounts payable to medium enterprises? No. Micro and small only.

Our vendor got Udyam registration mid-year. From when does this apply? The safest position is to test invoices raised after the supplier's registration, and take advice on edge cases.

Is the disallowance permanent? No. It is a timing shift: the deduction moves to the year of actual payment.

We have no written agreements with vendors. What is our limit? 15 days from acceptance of goods or services. Consider putting credit terms in writing; it legally extends the runway up to 45 days.