Section 43B(h): Pay MSMEs in 45 Days or Lose the Deduction

If your business buys from a registered micro or small supplier and pays late, Section 43B(h) of the Income Tax Act, 1961 pushes that expense out of your current year and lets you deduct it only in the year you actually pay. For a firm with thin margins, that single rule can swing a whole year of taxable profit, so the payment clock now matters as much as the invoice.

Section 43B of the Income Tax Act lists expenses you can deduct only when you have actually paid them, not merely when you booked them. The Finance Act, 2023 inserted a new clause (h) into this list, effective from 1 April 2024, that is, from Assessment Year 2024-25 (financial year 2023-24) onwards.

Clause (h) covers any sum a buyer owes to a micro or small enterprise for goods supplied or services rendered, where payment is made beyond the time limit set in Section 15 of the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006. If you cross that limit, the amount is allowed as a deduction only in the year you make the actual payment, not in the year the liability arose.

In plain terms: pay your micro or small supplier on time and you deduct the bill this year. Pay late and that deduction is parked until the year the money leaves your account.

Section 43B(h) borrows its deadline from Section 15 of the MSMED Act, 2006. That section fixes the buyer's payment duty as follows.

• With a written agreement: pay on or before the date agreed in writing. This agreed period can never exceed 45 days from the day of acceptance or deemed acceptance of the goods or services.
• Without a written agreement: pay before the appointed day, which is the day right after 15 days from acceptance or deemed acceptance. In short, 15 days.

So 45 days is the ceiling, available only if it is written into the contract. If you have nothing in writing, the limit drops to 15 days. There is no middle ground above 45 days, even if both sides verbally agree to longer terms.

This is the trap that catches even careful taxpayers. For most items in Section 43B, the first proviso gives relief: if you pay the amount on or before the due date of filing your income tax return under Section 139(1), you can still claim the deduction in the original year. That is how provident fund, taxes, and similar dues are usually rescued.

Clause (h) is deliberately kept outside that first proviso. For micro and small supplier dues, paying before the return due date does not restore the deduction. Only actual payment within the Section 15 window (15 or 45 days) protects the current-year claim. Miss the window and the deduction shifts to the year of payment, full stop.

Section 43B(h) does not apply to every supplier. The conditions are specific.

• Micro and small only. The clause covers dues to micro and small enterprises. Medium enterprises are outside it, so late payment to a medium supplier does not trigger disallowance under this clause.
• Supplier must be registered. The supplier should hold a valid Udyam registration as a micro or small enterprise. If the supplier is not registered as micro or small, the clause does not bite.
• Manufacturers and service providers. The supplier should be a manufacturer or a service provider for the dues to fall within the delayed-payment protection.
• Traders are generally excluded. Wholesale and retail traders can register on Udyam, but a 2021 Office Memorandum of the Ministry of Micro, Small and Medium Enterprises limited their MSME benefits to priority sector lending. The delayed-payment protection of the MSMED Act, and therefore Section 43B(h), is generally not extended to pure trading dues. Confirm the supplier's classification before relying on this.

The rule also sits inside the head Profits and gains of business or profession, so it applies to buyers computing taxable business or professional income on actual accounts. A buyer taxed under presumptive schemes such as Section 44AD or 44ADA declares income as a fixed percentage of turnover and does not claim these expenses separately, so the Section 43B disallowance does not apply in the same way. If you are unsure which basis fits your business, check with a tax professional.

1. Ask every supplier whether they are Udyam-registered, and as which category (micro, small, or medium).
2. Collect the Udyam Registration Number and note the category against each vendor in your accounting system.
3. Decide your payment term in writing for micro and small suppliers, capped at 45 days. If you have no written term, treat 15 days as the deadline.
4. Track each micro and small invoice against its due date, not just its booking date.
5. Clear micro and small dues within the window before your year-end close on 31 March.
6. At audit, reconcile any unpaid micro and small balances and disallow what crossed the window, so it is claimed only when actually paid.

• Udyam registration certificate or number for each micro and small supplier.
• Written payment-terms agreement, if any, showing the agreed period.
• Invoice date and date of acceptance or deemed acceptance of goods or services.
• Proof of actual payment date for every micro and small invoice.
• A year-end ageing report of outstanding micro and small dues.

• Assuming the ITR due date rescues you. Under the first proviso to Section 43B, it normally does. For clause (h) it does not. Only payment within 15 or 45 days protects the current-year deduction.
• Treating 45 days as automatic. The 45-day limit applies only when it is agreed in writing. With no written term, the limit is 15 days under Section 15 of the MSMED Act, 2006.
• Ignoring the micro-small boundary. The clause spares medium enterprises. Disallowing a medium supplier's dues under this clause is an error in the other direction.
• Forgetting traders are largely out. Pure wholesale or retail trading dues are generally outside this protection. Verify the supplier's Udyam category first.

Suppose Verma Components, a proprietorship run by Anil Verma in Ludhiana, buys machined parts worth ₹6,00,000 in February 2026 from a small enterprise supplier holding valid Udyam registration. There is no written payment term, so the Section 15 limit is 15 days. Anil pays in May 2026, well past the limit but before filing his return.

Because clause (h) is outside the first proviso, paying before the return due date does not help. The ₹6,00,000 is disallowed for FY 2025-26 and added back to that year's taxable profit. Anil can deduct it only in FY 2026-27, the year he actually paid. Had he paid by the 15-day mark, or fixed a written term up to 45 days and paid inside it, the deduction would have stayed in FY 2025-26.

If your micro or small unit supplies a government department or a public sector undertaking and payments run late, you have two parallel routes. You can file a delayed-payment claim before the MSME Samadhaan facilitation council under the MSMED Act, 2006. You can also use the RTI Act, 2005 to ask the buyer's public information officer for the status of your bill, the date of receipt, the sanction position, and the reason for delay. A precise RTI often surfaces a stuck file faster than a reminder letter, and the dated reply becomes useful evidence.

Our AI RTI Drafter can frame that payment-status request, the PIO Reply Checker tells you whether the reply is complete or evasive, and if the officer stays silent the First Appeal Builder prepares your next step. To raise the issue with a wider authority, try AwaazRTI. For the full method, see The RTI Playbook.

It was inserted by the Finance Act, 2023 and applies from 1 April 2024, that is, Assessment Year 2024-25 (financial year 2023-24) onwards.

No. The clause covers only micro and small enterprises. Dues to medium enterprises are outside this clause, so late payment to a medium supplier does not trigger disallowance under it.

No. 45 days is the maximum, and only when it is agreed in writing. With no written agreement, Section 15 of the MSMED Act, 2006 sets a 15-day limit from acceptance or deemed acceptance.

No. Clause (h) is kept outside the first proviso to Section 43B. Paying before the return due date does not restore the deduction. Only actual payment within the 15 or 45-day window protects the current-year claim.

Generally no. A 2021 Office Memorandum of the Ministry of MSME limited wholesale and retail traders' benefits to priority sector lending, so the delayed-payment protection, and Section 43B(h), is generally not extended to pure trading dues. Verify the supplier's Udyam category first.

It is added back to the year's taxable income and becomes deductible only in the later year in which you actually pay the supplier.

A buyer taxed under presumptive schemes such as Section 44AD or 44ADA declares income as a percentage of turnover and does not claim these expenses separately, so the Section 43B disallowance does not apply in the same way. Check your computation basis with a tax professional.

Ask for the Udyam Registration Number and category, and keep the Udyam certificate on file. The category recorded on Udyam decides whether clause (h) applies.

• Income Tax Act, 1961, Section 43B, clause (h), inserted by the Finance Act, 2023.
• Micro, Small and Medium Enterprises Development (MSMED) Act, 2006, Section 15 and Section 2(b).
• Office Memorandum, Ministry of Micro, Small and Medium Enterprises, 2021, on classification of wholesale and retail trade.

Reviewed by Dr. Shrawan Kumar Pathak. This guide is general information, not tax advice. Confirm your position with a qualified professional before filing.