Section 43B(h) explained: late payments to MSEs and the buyer’s tax deduction
Last reviewed 19 October 2026. General information, not legal or tax advice.
The rule
The Finance Act, 2023 added clause (h) to Section 43B of the Income-tax Act, 1961, effective from financial year 2023-24. When a business owes money to a micro or small enterprise and pays later than the time allowed by Section 15 of the MSMED Act (the agreed period, never more than 45 days from acceptance; 15 days if nothing is agreed in writing), it can claim that purchase as an expense only in the year it actually pays.
An example
A buyer accepts goods worth ₹10 lakh from a registered small supplier on 1 March 2026, on 45-day terms. Payment is due by 15 April 2026. If the buyer pays on 10 April, it deducts the expense in FY 2025-26 as normal. If it has not paid by 31 March and then pays on 20 May, after the 45 days, the ₹10 lakh is disallowed for FY 2025-26 and deducted in the year of payment instead.
Under the Income-tax Act, 2025
The Income-tax Act, 2025 replaced the 1961 Act from 1 April 2026. According to a Finance Ministry reply in Parliament reported in July 2026, the 43B(h) rule continues as Section 37(2)(g) of the new Act, applying from tax year 2026-27. No change to the substance of the rule was announced in the 2025 or 2026 Budgets.
Why it matters to suppliers
43B(h) gives your buyer’s finance team its own reason to pay you on time, especially near the financial year-end. Suppliers can use it in three ways:
- Show your Udyam registration and category (micro or small) on invoices and vendor-onboarding forms, so the buyer flags you correctly in its system.
- Send reminders in February and March for invoices that will cross 45 days around year-end.
- In a firm reminder, note politely that timely payment keeps the expense deductible for them.
Use the reminder generator for wording, and the 45-day rule guide for how the due date is worked out.
Frequently asked questions
Does paying before the tax-return due date save the deduction?
No. For most items under Section 43B, paying before the return due date is enough. Clause (h) is different: the deduction is allowed in the year of payment, unless the payment was made within the time limit in Section 15 of the MSMED Act.
Does it apply to payments to medium enterprises?
No. It covers amounts owed to micro and small enterprises only.
Is it a permanent disallowance?
No. It is a timing difference: the expense is deductible in the year the buyer actually pays. But it can raise the buyer’s tax bill for the year in which the payment was due.
Does Section 43B(h) still exist under the new Income-tax Act?
The Income-tax Act, 2025 applies from 1 April 2026. Government statements reported in July 2026 say the same rule continues as Section 37(2)(g) of the new Act. Confirm the current section reference with your CA.