Understanding Section 43B of the Income Tax Act is crucial for businesses, professionals, and tax consultants who wish to ensure compliance and avoid penalties. Whether you’re a small business owner, an accountant, or just curious about how certain tax deductions work, this section has a direct impact on how and when you can claim deductions.
In simple words, Section 43B emphasizes that specific expenses can only be deducted when they are actually paid, regardless of when they are incurred. This ensures transparency and timely payments, especially to the government and small businesses.
Section 43B of the Income Tax Act
| Key Details | Information |
|---|---|
| Applicable Law | Section 43B of the Income Tax Act, 1961 |
| Purpose | Allows deductions on certain expenses only on actual payment basis |
| Covered Expenses | Taxes, duties, employer contributions to PF & gratuity funds, interest on loans, bonus to employees, leave encashment, payments to Indian Railways, MSMEs |
| Recent Amendment (2023) | Section 43B(h): Deduction allowed only on actual payment to Micro & Small Enterprises (MSMEs) within MSMED Act timeline |
| Compliance Requirement | Payments must be made on or before filing ITR under Section 139(1) |
| Penalty for Non-Compliance | Disallowance of deduction, interest penalties |
Section 43B of the Income Tax Act plays a vital role in maintaining fiscal discipline and ensuring ethical financial practices. It benefits governments, financial institutions, employees, and MSMEs by linking tax deductions to actual payments. By following the prescribed rules—especially after the introduction of Section 43B(h) for MSMEs—businesses can stay compliant, avoid penalties, and foster positive business relationships.
What Is Section 43B of the Income Tax Act?
Section 43B was introduced to ensure taxpayers claim certain deductions only when they actually pay the specified expenses. It overrides the mercantile (accrual) accounting system, which usually allows businesses to deduct expenses when they are incurred, even if the payment happens later.
This provision helps the government and smaller businesses receive payments on time, preventing misuse of deductions without real payments being made.
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Why Is Section 43B Important?
Here’s why Section 43B compliance matters:
- Promotes timely statutory payments like taxes, duties, and welfare fund contributions.
- Encourages ethical business practices by ensuring payments to employees, banks, and suppliers are made without undue delays.
- Supports small businesses (MSMEs) through the recent amendment, ensuring they are paid within a set timeline.
- Prevents tax evasion by disallowing expenses not paid by due dates.
Expenses Covered Under Section 43B
Let’s break down the key types of expenses you can claim deductions on under Section 43B only when paid:
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1. Tax, Duty, Cess, or Fees
Any taxes, duties, cess, or fees under various laws—such as GST, Excise Duty, or Customs Duty—are deductible only after actual payment.
Example:
If a company collects GST from customers but delays paying it to the government, they can’t claim this as a deduction until they pay it.
2. Employer Contributions to Employee Welfare Funds
This includes contributions to:
- Provident Fund (PF)
- Superannuation Fund
- Gratuity Fund
The employer must pay these before the due date of filing the income tax return to claim deductions.
3. Bonus or Commission to Employees
Bonuses and commissions to employees are deductible only after actual disbursement. Notably, dividends paid to shareholders are not covered under this.
4. Interest on Loans
Interest payments to:
- Public Financial Institutions
- State Financial Corporations
- Scheduled Banks
…are deductible only upon actual payment.
Example:
If a company has a loan with a public bank and accrues interest but delays payment, they won’t get tax benefits until they pay the interest.
5. Leave Encashment
Leave encashment payments made to employees are deductible only when paid.
6. Payments to Indian Railways
If a business uses Indian Railways’ services (e.g., leasing wagons) and owes payments, deductions are available only when these are settled.
7. Payments to Micro and Small Enterprises (MSMEs)
Introduced in Finance Act 2023, effective April 1, 2024:
- Under Section 43B(h), payments to micro and small enterprises must be made within the time limit specified in the MSMED Act, 2006 (15 to 45 days).
- If payments exceed this limit, the deduction is allowed only in the year of actual payment.
This amendment is crucial in supporting the working capital needs of MSMEs.
Time Limits for Payments to MSMEs Under Section 43B(h)
| Scenario | Time Limit for Payment |
|---|---|
| Without written agreement | Within 15 days from acceptance |
| With written agreement | As per terms, but not exceeding 45 days |
| Non-payment beyond these limits | Deduction allowed only on actual payment in future years |
Compliance Requirements for Section 43B
To claim deductions:
- Make actual payments for the specified expenses.
- Pay before the due date of filing the Income Tax Return (ITR) under Section 139(1).
- Maintain payment records for tax assessments.
Non-compliance results in:
- Disallowance of deduction for the year of accrual.
- Deduction allowed only in the year of actual payment.
- Penalty interest (especially for late payments to MSMEs, charged at three times RBI’s bank rate).
Practical Example: How Section 43B Works
Scenario:
ABC Pvt Ltd owes ₹10 lakh GST and ₹5 lakh interest to a scheduled bank in FY 2024-25.
- If they pay both before filing their ITR (say by July 31, 2025), they can claim deductions in FY 2024-25.
- If they delay payment to October 2025, deduction shifts to FY 2025-26, increasing tax liability for FY 2024-25.
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Section 43B of the Income Tax Act FAQs
1. What happens if expenses under Section 43B are not paid by the due date?
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Deductions for those expenses will be disallowed for that financial year and allowed only in the year of actual payment.
2. Is the provision applicable to all businesses?
Yes, Section 43B applies to all types of businesses and taxpayers who follow the mercantile system of accounting.
3. What is Section 43B(h)?
It specifically mandates that payments to micro and small enterprises under MSMED Act timelines (15 to 45 days) must be made on time; otherwise, deductions are deferred until actual payment.
4. Can employers claim PF contributions as deductions if paid after the due date?
Yes, they can claim deductions if the PF contributions are paid before filing their ITR under Section 139(1), even if delayed beyond the fund’s due date.
