In short: The Section 43B(h) MSME payment deduction rule, effective from 1 April 2024, means that if you buy goods or services from a registered micro or small enterprise and do not pay within the statutory deadline, you cannot claim that expense as a deduction until you actually make the payment — no matter what your contract says.
Key points
- Section 43B(h) was introduced by the Finance Act 2023 and applies from Assessment Year 2024-25 (i.e. financial year starting 1 April 2024). It covers payments to micro and small enterprises only — medium enterprises are excluded.
- Without a written agreement, you must pay within 15 days of acceptance of goods or services. With a written agreement, you must pay within the agreed period, but that period cannot exceed 45 days — even if your contract says otherwise.
- The clock starts from the date of acceptance (or deemed acceptance) of goods or services, not from the invoice date. If you raise no objection within 15 days of delivery, acceptance is deemed to have occurred.
- Unlike every other clause in Section 43B, there is no relief for payments made before you file your income tax return. If the amount is unpaid on 31 March, it is disallowed for that year — full stop.
- Late payments also attract compound interest at three times the RBI’s bank rate under the MSMED Act, and that interest is not deductible under the Income-tax Act either.
- The supplier must hold valid Udyam registration, and traders (wholesale or retail) registered under Udyam are excluded from this rule even if they are technically registered.
What exactly does Section 43B(h) say?
Section 43B of the Income-tax Act, 1961 lists specific expenses that are deductible only on actual payment, not on accrual. Before the Finance Act 2023, this mainly covered taxes, duties, and employee contributions.
Clause (h) added a new category: amounts payable to micro or small enterprises for goods supplied or services rendered. The rule applies whether you follow cash-basis or mercantile-basis accounting.
This matters because most businesses account for expenses when they accrue — meaning they claim the deduction in the year the goods or services are received. Section 43B(h) overrides that for MSME suppliers.
What are the payment deadlines under the MSMED Act?
Section 43B(h) operates by reference to Section 15 of the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006. That section sets the following timelines.
| Situation | Deadline to pay | What happens if you miss it |
|---|---|---|
| No written agreement between buyer and supplier | 15 days from acceptance of goods/services | Payment becomes overdue; tax disallowance triggered if unpaid by 31 March |
| Written agreement exists | Agreed date, subject to a hard cap of 45 days from acceptance | Any agreed period beyond 45 days is ignored; disallowance still applies |
| Contract says 60 days (or more) | Still treated as 45 days maximum | The contractual term does not protect you from disallowance |
The key phrase is “from acceptance.” Acceptance is not the invoice date or the purchase order date. It is the date the buyer acknowledges receipt of the goods or services — or, if no objection is raised within 15 days of delivery, the date of delivery itself is treated as the date of acceptance.
Why is the ITR filing date exception so important here?
Most clauses in Section 43B give buyers a second chance. If you pay the amount before the due date for filing your income tax return under Section 139(1), you can still claim the deduction for the earlier year.
Section 43B(h) expressly excludes this relief. The proviso that allows this second-chance window does not apply to clause (h).
This means the cut-off is 31 March — the last day of the financial year. If you have not paid a MSME supplier by midnight on 31 March, the deduction is gone for that year. It will only become available in the year you actually make the payment.
A practical example
You receive goods from a Udyam-registered small enterprise on 1 February. There is a written agreement giving you 45 days. Payment is due by 17 March. You pay on 5 April instead.
Result: The expense is disallowed for the financial year ending 31 March. You can claim the deduction in the following financial year when payment is made. You also owe compound interest to the supplier under the MSMED Act — and that interest cannot be deducted from your taxable income either.
Which suppliers are covered — and which are not?
Covered: registered micro and small enterprises
The supplier must be a micro or small enterprise that has obtained Udyam registration under the MSMED Act. Udyam registration is the formal process of filing a memorandum with the designated authority. Only registered suppliers attract the disallowance.
If your supplier is a micro or small enterprise but has not obtained Udyam registration, Section 43B(h) does not apply — though the supplier may still have rights under the MSMED Act.
Not covered: medium enterprises
Section 43B(h) applies only to micro and small enterprises. Medium enterprises are expressly excluded. Check your supplier’s Udyam certificate to confirm the category.
Not covered: traders
Wholesale and retail traders can obtain Udyam registration, but only for priority sector lending benefits. Section 43B(h) does not apply to dues payable to traders, even if those traders hold Udyam registration.
Your own MSME status does not matter
The rule looks at the supplier’s status, not the buyer’s. Even if you are yourself a micro or small enterprise, you must comply with Section 43B(h) when paying a registered MSME supplier.
What should buyers do now?
Audit your supplier base before year-end
Go through your outstanding payables and check which suppliers hold Udyam registration as micro or small enterprises (excluding traders). These are the accounts where Section 43B(h) disallowance risk lives.
Track acceptance dates, not invoice dates
Build a system — even a simple spreadsheet — that records the date goods or services were accepted for each MSME supplier. That is the date from which the 15-day or 45-day clock runs.
Review your credit terms in written agreements
If any of your supplier agreements specify credit periods longer than 45 days with an MSME supplier, those terms will not protect you from tax disallowance. Consider renegotiating or restructuring payment cycles before the financial year closes.
Do not rely on the ITR filing window
For all other Section 43B expenses, you may have until the return filing date to make payment. For MSME payments, 31 March is the hard deadline. Budget accordingly.
For practical guidance on compliance steps and related commercial law topics, you can explore the Law for You guides at The Courtroom, which cover business and regulatory obligations in plain language.
How does this interact with the new Income-tax Act 2025?
The Income-tax Act, 1961 governs financial years up to and including FY 2025-26. From Tax Year 2026-27 onwards, the Income Tax Act 2025 applies. The fact sheet confirms that the rules described above cover both regimes across this period. If you are filing for Tax Year 2026-27 or later, verify the corresponding provision in the Income Tax Act 2025 against the primary sources listed below.
Frequently asked questions
Does Section 43B(h) apply if my MSME supplier has not obtained Udyam registration?
No. For the Section 43B(h) MSME payment deduction disallowance to apply, the supplier must be a micro or small enterprise that has obtained Udyam registration under the MSMED Act. An unregistered supplier — even if they qualify as a micro or small enterprise by size — does not trigger the disallowance. That said, the supplier may still have separate rights and remedies under the MSMED Act, so buyers should not treat unregistered status as a reason to delay payment.
My contract with an MSME supplier gives me 60 days to pay. Am I protected from disallowance?
No. The 45-day cap under Section 15 of the MSMED Act is absolute. Any agreed credit period beyond 45 days from the date of acceptance is ignored for the purpose of Section 43B(h). If you pay on day 55 — within your contractual 60-day window — the payment is still treated as late under the tax rules, and you lose the deduction for the financial year in which the liability accrued.
Can I recover the disallowed deduction in a later year?
Yes, but only in the year you actually make the payment. The disallowance is not permanent — it shifts the deduction to the financial year in which cash actually leaves your account. However, you will have paid tax on that income for the earlier year in the meantime, and any compound interest you pay to the supplier for the delay is also not deductible. The combined cost of delay — lost deduction timing plus non-deductible penal interest — can be significant.
Primary sources
- Income-tax Act, 1961 and Income Tax Act, 2025 — India Code (indiacode.nic.in)
- Micro, Small and Medium Enterprises Development Act, 2006 — India Code (indiacode.nic.in)
- Ministry of Micro, Small and Medium Enterprises — msme.gov.in (for Office Memoranda and Udyam registration)
- Income Tax Department, Government of India — incometax.gov.in
Written by Editorial Team, The Courtroom · Last verified 2026-07-14
This article is for general information only and is not legal advice. Laws change; verify against the primary sources cited and consult a qualified advocate for your situation.
