If a micro or small supplier's bill is still unpaid on 31 March 2027 and its payment deadline has already passed, you cannot claim that purchase as an expense for the year. The deduction moves to the year you actually pay. Paying a week later, before you file your return, does not bring it back.
That is the rule people still call section 43B(h). From 1 April 2026 it sits in section 37(2)(g) of the Income-tax Act, 2025, with the same substance. The deadline comes from section 15 of the MSMED Act: the date in your written agreement, capped at 45 days, or 15 days if nothing is agreed in writing.
Below is how the rule works, which suppliers it covers, a worked year-end example, and the payables routine we use with clients so the disallowance never reaches the tax audit report.
What does section 43B(h) say, and what is its new section number?
Section 43B(h) was inserted in the Income-tax Act, 1961 by the Finance Act, 2023 and first applied to FY 2023-24. It says that any sum payable to a micro or small enterprise beyond the time limit in section 15 of the MSMED Act is allowed as a deduction only in the year it is actually paid.
Under the Income-tax Act, 2025 the same rule is section 37(2)(g), inside section 37, which carries all the "actual payment" deductions such as taxes, bonus and employer contributions. The Ministry of Finance confirmed this mapping in a Rajya Sabha reply on 21 July 2026.
Which Act applies depends on the year:
FY 2025-26 (year ended 31 March 2026): section 43B(h) of the 1961 Act, reported in clause 22 of Form 3CD.
Tax year 2026-27 onward (year ending 31 March 2027): section 37(2)(g) of the 2025 Act.
If you are still getting used to the renumbering, our guide to old and new TDS sections under the Income-tax Act, 2025 covers the same transition for TDS.
Which suppliers does the 45-day rule cover?
Only micro and small enterprises registered under the MSMED Act, which in practice means suppliers holding Udyam registration as a manufacturer or service provider. The buyer's own size or registration does not matter. A large company and a two-person firm are treated the same way.
The classification limits were revised from 1 April 2025. An enterprise must meet both the investment and the turnover test:
Category | Investment in plant, machinery or equipment | Annual turnover | Covered by 43B(h) / 37(2)(g)? |
|---|---|---|---|
Micro | Up to ₹2.5 crore | Up to ₹10 crore | Yes |
Small | Up to ₹25 crore | Up to ₹100 crore | Yes |
Medium | Up to ₹125 crore | Up to ₹500 crore | No |
Three groups fall outside the rule:
Medium enterprises. A supplier that grew from small to medium last year drops out. Ask for the current Udyam certificate, not the one from onboarding.
Unregistered suppliers. No Udyam registration, no 43B(h) exposure.
Traders. Retail and wholesale traders can register on Udyam since a Ministry of MSME office memorandum of 2 July 2021, but the benefit was limited to priority sector lending. The widely held view is that the delayed payment provisions, and with them this disallowance, do not apply to dues to traders.
Where a supplier both trades and manufactures, check what the particular bill is for. A distributor that also runs a small packing unit can be in scope for one invoice and out of scope for another.
How do you calculate the payment deadline?
The clock starts on the day of acceptance of the goods or services, not on the invoice date. If you raise no written objection within 15 days of delivery, the delivery date is the day of deemed acceptance. If you do object, acceptance is the day the defect is put right.
From there, section 15 of the MSMED Act gives two routes:
Written agreement: pay by the agreed date. The agreed period cannot exceed 45 days. A purchase order that says 60 or 90 days is read as 45. A purchase order that says 30 days means 30.
No written agreement: pay before the day following the expiry of 15 days from acceptance. In plain terms, within 15 days.
The second point catches many businesses. They assume "45 days for MSMEs", but if the credit period was only agreed on a phone call, the limit is 15 days.
Is every MSME bill unpaid on 31 March disallowed?
No. Two conditions must both be true at year-end: the bill is unpaid, and its deadline has already passed. A bill dated 25 March with a 45-day agreement is unpaid on 31 March but not overdue. If you pay it within its deadline in April, the deduction stays in the year of purchase.
The reverse also holds. A bill paid late but still within the same financial year is allowed in that year, because the actual payment happened in the year. The disallowance only bites on amounts that are overdue at year-end, or that are paid after their deadline in the next year.
The ordinary 43B relief, where a payment made before the return due date saves the deduction, does not apply to this clause. That relief is expressly excluded.
A worked example: one manufacturer's payables on 31 March 2027
Say you run a garment unit in Surat that takes GST input tax credit on its purchases. Here are five creditor balances still unpaid on 31 March 2027. Amounts are taxable values, because with ITC claimed the GST portion never goes to your profit and loss account.
Supplier | Status | Terms | Accepted on | Deadline | Taxable value | Treatment for 2026-27 |
|---|---|---|---|---|---|---|
Packaging maker | Micro, manufacturer | 30 days in writing | 12 Feb 2027 | 14 Mar 2027 | ₹2,00,000 | Disallowed: overdue at year-end |
Transporter | Micro, service provider | 60 days in PO, capped at 45 | 5 Feb 2027 | 22 Mar 2027 | ₹60,000 | Disallowed: overdue at year-end |
Dyeing job worker | Small, service provider | Nothing in writing | 20 Mar 2027 | 4 Apr 2027 | ₹1,50,000 | Allowed if paid by 4 April |
Yarn dealer | Udyam as trader | 60 days | 10 Jan 2027 | Not applicable | ₹5,00,000 | Outside the rule |
Machine service firm | Medium | 30 days | 1 Feb 2027 | Not applicable | ₹80,000 | Outside the rule |
The arithmetic:
Packaging maker: 12 February plus 30 days is 14 March. Unpaid on 31 March, so ₹2,00,000 is disallowed.
Transporter: the 60-day term is capped at 45. 5 February plus 45 days is 22 March. Unpaid on 31 March, so ₹60,000 is disallowed.
Disallowed so far: ₹2,00,000 + ₹60,000 = ₹2,60,000.
If your firm pays tax at 30% plus 4% cess, that is ₹2,60,000 × 31.2% = ₹81,120 of extra tax for 2026-27. You get the deduction back in 2027-28 when you pay, but the cash goes out a year early.
Now the job worker. With no written terms, the deadline is 4 April 2027. Pay on 3 April and the ₹1,50,000 stays deductible in 2026-27. Pay on 20 April and it joins the disallowance, taking the total to ₹4,10,000 and the extra tax at 31.2% to ₹1,27,920. One payment date moves ₹46,800 of tax between years.
The yarn dealer is the largest and oldest balance, yet it costs nothing under this rule. That is why a simple "creditors over 45 days" report overstates the problem for some businesses and understates it for others.
What else does a late MSME payment cost?
The tax deferral is not the only cost. Under section 16 of the MSMED Act, a buyer who pays late owes the supplier compound interest with monthly rests at three times the bank rate notified by the Reserve Bank of India, from the appointed day. Section 23 of the same Act says that interest is not deductible for income tax. Few suppliers claim it, but the liability exists and can surface before an MSME Facilitation Council.
Companies have one more filing. Form MSME-1 is a half-yearly return to the MCA listing dues to micro and small suppliers outstanding for more than 45 days: by 31 October for April to September, and by 30 April for October to March. The figures in that form, the tax audit report and the Schedule III note on MSME dues should agree with each other.
A year-end payables routine that prevents the disallowance
The fix is not a year-end journal entry. It is a payment calendar that starts in January. This is the routine we follow with clients:
Tag every creditor once. Collect the Udyam certificate, note micro, small, medium, trader or unregistered, and recheck each April because classifications change. Verify numbers on the Udyam portal rather than trusting a letterhead.
Record the agreed credit days. If there is no written agreement, record 15 days. If the PO says more than 45, record 45.
Book purchase bills on the acceptance date. A bill entered three weeks late hides how close it is to its deadline.
Run the creditors' ageing report every fortnight from January. Filter it to micro and small suppliers and sort by days remaining, not days outstanding.
Pay overdue MSME bills before 31 March. An overdue bill paid on 30 March is fully deductible this year. The same bill paid on 2 April is not.
List bills falling due in April. These are deductible this year only if paid on time, so schedule them before the deadline.
Compute the disallowance on 31 March. Keep the working with invoice dates, acceptance dates and Udyam status so your CA can tie it to the computation of income.
Where hisabkitab fits in
Steps 3 and 4 are where most businesses slip, because the purchase register runs weeks behind. hisabkitab's bookkeeping software reads purchase bills and PDFs with AI OCR, so bills reach the books on time, and the outstanding and ageing reports show each creditor's unpaid bills by age. Check that list against your micro and small supplier list every fortnight from January. The full set of reports, including ledger, day book and Schedule III, is on the accounting software features page.
If you are a CA preparing this working for many clients, the CA module gives one login across client companies, with roles and an audit trail.
Frequently asked questions
Does section 43B(h) apply to medium enterprises?
No. It applies only to amounts payable to micro and small enterprises. Dues to medium enterprises and to suppliers without Udyam registration are outside the rule.
Can I claim the deduction if I pay before filing my income tax return?
No. The usual 43B relief for payments made before the return due date does not apply to MSME dues. The deduction moves to the year of actual payment.
Is the 45-day limit counted from the invoice date?
No. It runs from the day of acceptance or deemed acceptance of the goods or services. Without a written agreement, the limit is 15 days, not 45.
Does section 43B(h) apply to purchases from traders?
The widely held view is no. Traders can hold Udyam registration, but only for priority sector lending, and the delayed payment provisions of the MSMED Act are not available to them.
What is the section number for 43B(h) under the Income-tax Act, 2025?
Section 37(2)(g). It applies from tax year 2026-27. For FY 2025-26, section 43B(h) of the 1961 Act still governs.
Is the disallowed amount lost for good?
No. It is deductible in the year you actually pay the supplier. The cost is the earlier tax outflow plus any MSMED Act interest, which is not deductible.
The MSMED Act text, including sections 15, 16 and 23, is published by the Office of the Development Commissioner (MSME).
Want your MSME creditors ready for 31 March? Start a free trial or compare plans.
