AS | Ankit Sarawagi|Founder, CFOmatrix·July 2026·9 min read | Buyer and supplier view |
- Pay late, lose the deduction this year. A late payment to a micro or small supplier is deductible only in the year you actually pay, not the year you booked the expense.
- No grace period. Unlike the rest of Section 43B, clause (h) has no “pay before filing” relief. Miss the 15 or 45 days and the current-year deduction is gone.
- Effective AY 2024-25. It bites from FY 2023-24 onwards; every March-end close now includes an MSME dues sweep.
- Manufacturers and service providers only. Micro and small suppliers on Udyam are covered; wholesale and retail traders are not.
- Same rule, new number. Under the Income-tax Act 2025 this becomes Section 37(2)(g) from Tax Year 2026-27, with no change in substance.
| AY 2024-25 Section 43B(h) is live from this assessment year (FY 2023-24 onwards) | 15 / 45 Days to pay (no written agreement / with one) before the deduction is deferred | No grace Paying before you file does NOT save the current-year deduction |
What Section 43B(h) Says, in Plain English
Section 43B(h) of the Income Tax Act 1961 was inserted by the Finance Act 2023 and is effective from assessment year 2024-25 (financial year 2023-24 onwards). Section 43B is the “allowed only on actual payment” family of provisions: certain expenses are deductible in the year they are actually paid, not merely the year they are booked. Clause (h) adds a new member to that family, dues to micro and small enterprises.
In one sentence: if a buyer does not pay a registered micro or small supplier within the time limit set by the MSMED Act, the buyer can deduct that expense only in the year it actually makes the payment. Pay within the limit and the deduction is completely normal. Miss the limit and the deduction is pushed out to a later year, which raises taxable profit and tax in the year the expense was incurred.
43B(h) does not change what you owe or add a penalty on the purchase. It changes the timing of the tax deduction. That timing shift, landing across a 31 March year-end, is exactly what turns a slow payment into a real cash cost for the buyer.
The 15/45-Day Test, Tied to the MSMED Act
Section 43B(h) does not invent its own deadline. It borrows the payment clock from Section 15 of the MSMED Act 2006. That is the same 15-day and 45-day test that governs the interest right, so the two rules move together.
The key trigger is the buyer’s own year-end. If a micro or small dues is unpaid at 31 March and already past its 15 or 45 day limit, it is disallowed for that year and added back to profit. To dig into the deadline itself, see the 45-day payment rule explained.
The Disallowance Mechanism, With Numbers
The cleanest way to see why buyers care is a worked example. Say a buyer purchases ₹10 lakh of goods from M/s ABC, a registered small manufacturer, in March, on a 30-day credit term. Year-end arrives on 31 March and the bill is still unpaid, already past the 45-day limit. Assume the buyer is a company taxed at roughly 25% and would otherwise have ₹40 lakh of taxable profit.
| Paid on time | Unpaid at year-end | |
| Taxable profit before the MSME bill | ₹40,00,000 | ₹40,00,000 |
| Deduction for the ₹10 lakh purchase | Allowed this year | Disallowed (added back) |
| Taxable profit for the year | ₹30,00,000 | ₹40,00,000 |
| Tax at ~25% | ₹7,50,000 | ₹10,00,000 |
By sitting on a ₹10 lakh bill past year-end, the buyer’s taxable profit is ₹10 lakh higher and it pays roughly ₹2.5 lakh more tax this year. It does get the deduction back when it eventually pays, so the money is not lost forever, but it has effectively made an interest-free loan of that extra tax to the government, on top of the MSMED interest clock already running against it. That combination is what makes finance teams move.
The Crucial No-Grace-Period Point
This is the detail most people get wrong, and it is the whole reason 43B(h) has teeth. The main body of Section 43B carries a well-known proviso: for most 43B items (taxes, PF, interest to banks and so on), you keep the current-year deduction as long as you pay before the due date for filing the return. Founders are used to that safety net.
Clause (h) is deliberately kept out of that proviso. There is no “pay before filing” relief for micro and small dues. So paying your supplier on, say, 20 September for a bill that breached the 45-day limit before 31 March does not restore the deduction for the earlier year. The deduction only lands in the year of actual payment.
Do not assume your usual 43B habit of clearing dues just before you file will protect the deduction. For micro and small suppliers it will not. The only way to keep the current-year deduction is to pay within the 15 or 45 day limit itself, well before year-end.
Who Is Covered (and Why Traders Are Not)
43B(h) is narrow about which suppliers it protects. Get this wrong and you either over-report dues you did not need to, or miss a disallowance you should have flagged.
New to registration on the supplier side? Start with the half-yearly MSME Form 1 return if you are the buyer, which sits alongside 43B(h) as the other MSME dues compliance. To confirm which of your vendors qualify, get their Udyam status in writing.
How the Auditor Reports It: Form 3CD
43B(h) is not something a buyer can quietly ignore, because the tax auditor has to report it. In a tax audit, dues to micro and small enterprises are captured in Form 3CD, clause 22. The auditor breaks the year’s MSME dues into buckets and flags the ones that must be added back.
Do not let clause 22 be a March surprise. Tag micro and small vendors in your accounting system with their Udyam status and the applicable 15 or 45 day term, and run an ageing report on those balances monthly. By the time the auditor asks, the disallowance should already be known and, ideally, already paid down.
The New Section 37(2)(g) Under the Income-tax Act 2025
The Income-tax Act 2025 rewrites and reorganises the old 1961 Act. In that rewrite, the 43B(h) rule is renumbered as Section 37(2)(g), effective from Tax Year 2026-27. The substance does not change: a deduction for a purchase from a micro or small enterprise is allowed only in the year of actual payment if paid beyond the 15 or 45 day limit, still with no grace-period relief.
The only practical thing that changes is which section number you cite. Here is the mapping so your notices, working papers and audit files quote the right provision for the right year.
| Financial year | Cite this section | The rule |
| FY 2024-25 | Section 43B(h) | Deduction in year of actual payment if paid beyond 15/45 days |
| FY 2025-26 | Section 43B(h) | Same rule, unchanged |
| FY 2026-27 onward | Section 37(2)(g) | Same rule, renumbered (Income-tax Act 2025, Tax Year 2026-27) |
What Buyers and Suppliers Should Do
If you are the buyer: year-end precautions before 31 March
The mistake to avoid is discovering the disallowance when the auditor computes it. Work through this before the year closes.
For a full buyer-side system, see our MSME vendor-compliance playbook.
If you are the supplier: how to use 43B(h) as leverage
For a micro or small supplier, 43B(h) is quiet leverage you already hold. You do not have to file anything to use it. When you send a payment reminder, state plainly that you are a registered micro or small enterprise on Udyam and that the invoice falls under Section 43B(h). That single line changes the buyer’s math: pay you now and keep the deduction, or delay and add to its own tax bill this year, on top of the MSMED interest clock.
“43B(h) did in one clause what years of interest provisions could not: it made paying a small vendor on time the buyer’s own tax problem. Suppliers who simply mention it get paid faster.”
Ankit Sarawagi, CFOmatrix43B(h) works best alongside the rest of the MSME toolkit, the 45-day rule, the interest right and the Samadhaan remedy. For the full picture, read our MSME delayed-payment recovery guide.
Frequently Asked Questions
What is Section 43B(h) of the Income Tax Act?
Section 43B(h) of the Income Tax Act 1961, effective from assessment year 2024-25, says a buyer can claim a purchase from a registered micro or small enterprise as a tax deduction only in the year it actually pays, if payment is made beyond the MSMED Act limit of 15 days (no written agreement) or 45 days (with a written agreement). Pay on time and the deduction is normal; pay late and it shifts to the year of actual payment, raising taxable profit and tax in the current year.
From when is Section 43B(h) effective?
Section 43B(h) applies from assessment year 2024-25, which covers financial year 2023-24 onwards. Returns for FY 2024-25 and FY 2025-26 cite Section 43B(h). Under the new Income-tax Act 2025 the same rule is renumbered Section 37(2)(g), effective Tax Year 2026-27, with no change to the substance.
Does Section 43B(h) apply to traders?
No. Section 43B(h) covers dues to micro and small manufacturers and service providers registered on Udyam. Wholesale and retail traders can register on Udyam but only for priority-sector lending, and per MSME Ministry clarification they are outside the delayed-payment mechanism. So a late payment to a trader does not trigger 43B(h) disallowance.
Is there a grace period if I pay late but before filing the return?
No. This is the trap. The rest of Section 43B has a proviso that lets you keep a current-year deduction if you pay before the due date for filing the return. Clause (h) is deliberately carved out of that proviso. So paying a micro or small supplier after the 15 or 45 day limit, even if before you file, does not save the current-year deduction. The deduction only comes in the year of actual payment.
What changed under the Income-tax Act 2025?
The Income-tax Act 2025 rewrites and renumbers the law. The 43B(h) rule moves to Section 37(2)(g), effective Tax Year 2026-27. The test is unchanged: a deduction for a micro or small enterprise purchase is allowed only in the year of actual payment if paid beyond the 15 or 45 day limit. Practically, cite Section 43B(h) for FY 2024-25 and FY 2025-26 returns, and Section 37(2)(g) from FY 2026-27 onwards.
How does the auditor report a 43B(h) disallowance?
In a tax audit, the auditor reports amounts payable to micro and small enterprises in Form 3CD, clause 22, distinguishing dues paid within the limit, dues paid late, and dues still outstanding at year-end. Amounts unpaid beyond the 15 or 45 day limit are flagged for disallowance and added back to taxable income. This makes the disallowance visible and hard to miss during assessment.
Sources: Income Tax Act 1961, Section 43B(h) (inserted by the Finance Act 2023, effective AY 2024-25) and the first proviso to Section 43B; Micro, Small and Medium Enterprises Development (MSMED) Act 2006, Section 15 (15/45-day limit); Form 3CD, clause 22 (tax audit report under Section 44AB); Income-tax Act 2025, Section 37(2)(g) (effective Tax Year 2026-27); MSME Ministry clarification on traders and Udyam. Tax rates in the worked example are illustrative.
This is general educational information, current to mid-2026, and not legal or tax advice. Rates, forms and procedures change; verify the current position or consult a professional before acting on a specific matter.
AS | Founder, CFOmatrix | Finance Strategy & Equity Compliance CFOmatrix is a knowledge platform focused on how finance actually works inside growing companies. This guide draws on hands-on experience with MSME dues, tax audits and the delayed-payment mechanism, alongside the current statutory and tax position. |