Section 43B of the Income-tax Act, 1961: Deductions Allowed on Actual Payment
Section 43B restricts the timing of deductions for specified business expenses, including statutory dues, employer contributions, interest payable to specified lenders, leave encashment and delayed payments to micro and small enterprises.
What does Section 43B mean?
Section 43B is a special rule overriding the ordinary accrual-based deduction timing for specified expenses. Even if a qualifying liability is recorded in the accounts, a deduction is generally available only when it is actually paid. The provision affects the timing of an otherwise allowable deduction; it does not by itself make a non-deductible expense deductible.
Return-filing-date relaxation: For most clauses, a payment made after the end of the previous year but on or before the due date for filing the return under Section 139(1) may be deducted in the year the liability arose, subject to the applicable conditions. Clause (h) for micro and small enterprise dues is excluded from this relaxation.
Payments covered by Section 43B
| Clause | Type of expenditure | Important rule |
|---|---|---|
| (a) | Tax, duty, cess or fee payable under law | Actual payment is ordinarily required. |
| (b) | Employer contributions to provident fund, superannuation fund, gratuity fund or other employee welfare funds | Distinguish employer contributions from employee contributions. |
| (c) | Bonus or commission to employees covered by Section 36(1)(ii) | Deduction is subject to the payment rule. |
| (d) | Interest payable to specified public financial institutions and state financial bodies | Capitalisation or conversion of interest into another borrowing does not necessarily amount to payment. |
| (da) | Interest payable to specified non-banking financial companies | Check the statutory class of lender and payment conditions. |
| (e) | Interest on loans or advances from specified scheduled or co-operative banks | Subject to statutory exclusions and conditions. |
| (f) | Employer liability for leave encashment | Generally deductible on actual payment. |
| (g) | Payments to Indian Railways for use of railway assets | Subject to actual payment. |
| (h) | Payments to micro or small enterprises beyond the MSMED Act Section 15 deadline | No return-filing-date extension under the Section 43B proviso. |
These are statutory categories, not a general rule that every business expense must be paid before the return-filing date. The conditions for each clause must be checked.
Employer contributions versus employee contributions
Clause (b) concerns amounts payable by the employer as its own contribution. Amounts deducted from employees' salaries are separately governed by Section 36(1)(va) and Section 2(24)(x). The return-filing-date relief under Section 43B should not be assumed to apply to delayed employee contributions.
Interest converted into a fresh loan
Under the relevant Explanations to Section 43B, conversion of covered unpaid interest into a loan, advance, debenture or another instrument deferring the liability is not, by itself, treated as actual payment. Review the particular lender category and applicable statutory text.
Section 43B(h): Payments to Micro and Small Enterprises
Clause (h), introduced by the Finance Act, 2023 with effect from assessment year 2024-25, concerns amounts payable to a micro or small enterprise beyond the time limit in Section 15 of the Micro, Small and Medium Enterprises Development Act, 2006. It does not automatically apply to every enterprise described informally as an MSME; supplier status and statutory eligibility matter.
- No written payment agreement: payment is generally required within 15 days from the relevant day of acceptance or deemed acceptance under the MSMED Act.
- Written agreement: the agreed period cannot exceed 45 days from the relevant day of acceptance or deemed acceptance.
- Late payment: when clause (h) applies and the statutory deadline is missed, the deduction is deferred until the year of actual payment; payment by the income-tax return due date does not override this result.
Check the supplier's qualifying status, nature of supply, invoice acceptance dates, agreed payment terms and evidence of payment. Medium enterprises are not covered by clause (h). Interest for delayed MSME payments is separately governed by the MSMED Act and its income-tax treatment must also be considered.
Practical Examples
Example 1: Statutory tax paid before return due date
A business incurs a deductible statutory levy during the financial year but pays it after 31 March and before its applicable Section 139(1) return due date. Subject to the statutory conditions, the Section 43B proviso can permit deduction for the year of liability.
Example 2: Micro enterprise invoice paid after statutory deadline
A qualifying micro enterprise supplies goods and the buyer has a written agreement for payment within 30 days. The buyer pays 60 days after acceptance. Where clause (h) applies, the deduction is generally available in the year of actual payment, even if the payment precedes the income-tax return due date.
Example 3: Bank interest converted into another facility
Unpaid interest owed to a lender covered by Section 43B is converted into a fresh borrowing. Merely documenting the conversion does not constitute actual payment for the relevant Section 43B interest rule.
Corresponding Provision: Section 37 of the Income-tax Act, 2025
The Income-tax Act, 2025 uses Section 37, Certain deductions allowed on actual payment basis only, for the corresponding subject. It expressly sets out the covered sums, payment-year rule, return-due-date exception (excluding delayed micro and small enterprise payments), interest conversion rules and the rule preventing double deduction. Its Section 37(6) also distinguishes employee contributions.
Read the official Income-tax Act, 2025 (PDF) for the precise provision and commencement, and apply the legislation governing the relevant tax year.
Frequently Asked Questions
What is Section 43B?
It is a timing rule under the Income-tax Act, 1961: specified business deductions are generally allowed when the liability is actually paid, subject to a return-filing-date relaxation for most categories.
Does the income-tax return due date extension apply to MSME dues?
No. Clause (h) is expressly excluded from the return-filing-date proviso. The statutory MSMED payment deadline and the actual date of payment must be examined.
Does Section 43B cover employee PF contributions?
Employer contributions fall under clause (b). Employee contributions are governed separately by section 36(1)(va) read with section 2(24)(x); the section 43B relaxation does not cure a late employee contribution.
What provision applies from 1 April 2026?
Section 37 of the Income-tax Act, 2025 contains the corresponding actual-payment deduction rules for the new regime. Earlier tax years remain subject to the applicable 1961 Act provisions and savings rules.
Official Legal References
Original Statutory Material and Amendment History
The following material is preserved from the earlier webpage for historical reference. It predates important amendments, including clauses (da) and (h), and must not be relied upon as the current consolidated statutory text. Consult the official sources above for the applicable version.
Read preserved original Section 43B extract and footnotes
1Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of-
2 (a) any sum payable by the assessee by way of tax, duty, cess or fee, by whatever name called, under any law for the time being in force, or
(b) any sum payable by the assessee as an employer by way of contribution to any provident fund or superannuation fund or gratuity fund or any other fund for the welfare of employees, 3 or
3 (c) any sum referred to in clause (ii) of sub-section (1) of section 36, 4 or
4 (d) any sum payable by the assessee as interest on any loan or borrowing from any public financial institution 5 or a State financial corporation or a State industrial investment corporation, in accordance with the terms and conditions of the agreement 6 governing such loan or borrowing; or
7 (e) any sum payable by the assessee as interest on any 8 loan or advances from a scheduled bank 9or a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank in accordance with the terms and conditions of the agreement governing 10such loan or advances, 11or
11(f) any sum payable by the assessee as an employer in lieu of any leave at the credit of his 12employee, or
13(g) any sum payable by the assessee to the Indian Railways for the use of railway assets, shall be allowed (irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him) only in computing the income referred to in section 28 of that previous year in which such sum is actually paid by him:
14 Provided that nothing contained in this section shall apply in relation to any sum 15 *** which is actually paid by the assessee on or before the due date applicable in his case for furnishing the return of income under sub-section (1) of section 139 in respect of the previous year in whichthe liability to pay such sum was incurred as aforesaid and the evidence of such payment is furnished by the assessee along with such return.
16 * * * * *
Explanation 17 1.-For the removal of doubts, it is hereby declared that where a deduction in respect of any sum referred to in clause (a) or clause (b) of this section is allowed in computing the income referred to in section 28 of the previous year (being a previous year relevant to the assessment year commencing on the 1st day of April, 1983, or any earlier assessment year) in which the liability to pay such sum was incurred by the assessee, the assessee shall not be entitled to any deduction under this section in respect of such sum in computing the income of the previous year in which the sum is actually paid by him:
18 Explanation 2.-For the purposes of clause (a), as in force at all material times, "any sum payable" means a sum for which the assessee incurred liability in the previous year even though such sum might not have been payable within that year under the relevant law.
19 Explanation20 3.-For the removal of doubts it is hereby declared that where a deduction in respect of any sum referred to in clause (c) 21 or clause (d) of this section is allowed in computing the income referred to in section 28 of the previous year (being a previous year relevant to the assessment year commencing on the 1st day of April, 1988, or any earlier assessment year) in which the liability to pay such sum was incurred by the assessee, the assessee shall not be entitled to any deduction under this section in respect of such sum in computing the income of the previous year in which the sum is actually paid by him.
22 Explanation 3A.-For the removal of doubts, it is hereby declared that where a deduction in respect of any sum referred to in clause (e) of this section is allowed in computing the income referred to in section 28 of the previous year (being a previous year relevant to the assessment year commencing on the 1st day of April, 1996, or any earlier assessment year) in which the liability to pay such sum was incurred by the assessee, the assessee shall not be entitled to any deduction under this section in respect of such sum in computing the income of the previous year in which the sum is actually paid by him.
23Explanation 3B.-For the removal of doubts, it is hereby declared that where a deduction in respect of any sum referred to in clause (f) of this section is allowed in computing the income, referred to in section 28, of the previous year (being a previous year relevant to the assessment year commencing on the 1st day of April, 2001, or any earlier assessment year) in which the liability to pay such sum was incurred by the assessee, the assessee shall not be entitled to any deduction under this section in respect of such sum in computing the income of the previous year in which the sum is actually paid by him.
24 Explanation 3C.-For the removal of doubts, it is hereby declared that a deduction of any sum, being interest payable under clause (d) of this section, shall be allowed if such interest has been actually paid and any interest referred to in that clause which has been converted into a loan or borrowing shall not be deemed to have been actually paid.
25 Explanation 3D.-For the removal of doubts, it is hereby declared that a deduction of any sum, being interest payable under clause (e) of this section, shall be allowed if such interest has been actually paid and any interest referred to in that clause which has been converted into a loan or advance shall not be deemed to have been actually paid.
26 Explanation 4.-For the purposes of this section,-
(a) "public financial institutions" shall have the meaning assigned to it in section 4A of the Companies Act, 1956 (1 of 1956);
27 (aa) "scheduled bank" shall have the meaning assigned to it in the Explanation to clause (iii) of sub-section (5) of section 11;
(b) "State financial corporation" means a financial corporation established under section 3 or section 3A or an institution notified under section 46 of the State Financial Corporations Act, 1951 (63 of 1951);
(c) "State industrial investment corporation" means a Government company within the meaning of section 617 of the Companies Act, 1956 (1 of 1956), engaged in the business of providing longterm finance for industrial projects and 28 eligible for deduction under clause (viii) of sub-section (1) of section 36.
29 (d) "co-operative bank", primary agricultural credit society" and "primary
co-operative agricultural and rural development bank" shall have the meanings
respectively assigned to them in the Explanation to sub-section (4) of section
80P.
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1. Ins. by Act 11 of 1983, s. 18 (we.f. 1-4-1984).
2. Subs. by Act 26 of 1988, s. 12, for clause (a) (w.e.f. 1-4-1989).
3. Ins. by Act 4 of 1988, s. 15 (w.e.f. 1-4-1989).
4. Ins. by Act 26 of 1988, s. 12 (w.e.f. 1-4-1989).
5. Ins. by Act 12 of 1990, s. 13 (w.e.f. 1-4-1991).
6. Subs. by Act 33 of 1996, s. 18, for governing such loan or borrowing (w.e.f.
1-4-1997).
7. Ins. by s. 18, ibid. (w.e.f. 1-4-1997).
8. Subs. by Act 32 of 2003, s. 21, for term loan (w.e.f. 1-4-2004).
9. Ins. by Act 7 of 2017, s. 17 (w.e.f. 1-4-2018).
10. Subs. by Act 32 of 2003, s. 21, for such loan (w.e.f. 1-4-2004).
11. Ins. by Act 14 of 2001, s. 27 (w.e.f. 1-4-2002).
12. Subs. by Act 28 of 2016, s. 23, for employee ( w.e.f. 1-4-2017).
13. Ins. by s. 23, ibid. (w.e.f. 1-4-2017).
14. Ins. by Act 11 of 1987, s. 10 (w.e.f. 1-4-1988).
15. The words "referred to in clause (a) or clauses (c) or clause (d) or clause
(f)" omitted by Act 32 of 2003, s. 21 (w.e.f. 1-4-2004).
16. The second proviso omitted by s. 21, ibid. (w.e.f. 1-4-2004).
17. The Explanation numbered as Explanation 1 thereof by Act 4 of 1988, s. 15 (w.e.f.
1-4-1989).
18. Ins. by Act 13 of 1989, s. 9 (w.e.f. 1-4-1984).
19. Ins. by Act 4 of 1988, s. 15 (w.e.f 1-4-1989).
20. Explanation 2 renumbered as Explanation 3 thereof by Act 13 of 1989, s. 9 (w.e.f.
1-4-1984).
21. Ins. by Act 26 of 1988, s. 12 (w.e.f. 1-4-1989).
22. Ins. by Act 33 of 1996, s. 18 (w.e.f. 1-4-1997).
23.Ins. by Act 14 of 2001, s. 27 (w.e.f. 1-4-2002).
24. Ins. by Act 21 of 2006, s. 12 (w.e.f. 1-4-1989).
25. Ins. by s. 12, ibid. (w. e. f. 1-4-1997).
26. Ins. by Act 12 of 1990, s. 13 (w.e.f. 1-4-1991).
27. Subs. by Act 27 of 1999, s. 27 (w.e.f. 1-4-2000).
28. Subs. by Act 10 of 2000, s. 20 (w.e.f. 1-4-2000).
29. Ins. by Act 7 of 2017, s. 17 (w.e.f. 1-4-2018).
Educational information only. Apply the statute, notifications, judicial decisions and facts relevant to the applicable tax year.