Section 43B(h) lets a business deduct an amount owed to a micro or small enterprise only when it is paid, if it is paid after the deadline in section 15 of the MSMED Act, 2006. That deadline is the agreed date, which can be no more than 45 days after acceptance of the goods or services, or 15 days if there is no written agreement. Amounts paid late but within the same year are still deductible that year. Amounts outstanding at year-end and paid late are disallowed and deducted in the year of payment.
The rule continues under the Income-tax Act, 2025 from tax year 2026-27, reported as section 37(2)(g), and in a Rajya Sabha reply on 21 July 2026 the government restated the 45-day limit without announcing any relaxation. Avoiding disallowance comes down to five things: knowing which suppliers are micro or small, recording acceptance dates, agreeing terms of 45 days or less, paying on time and reviewing open dues before year-end. This checklist from The Classic Partners LLP, Chartered Accountants in Andheri East, Mumbai, explains each step for FY 2026-27 tracking. It is based on the law and published sources as of 30 October 2026.
Key takeaways
- Covered: micro and small enterprises under the MSMED Act; medium enterprises are not, and traders are generally outside.
- Deadline: the agreed date up to 45 days from acceptance, or 15 days without a written agreement.
- Disallowance only bites on amounts unpaid at year-end and paid after the deadline; the deduction moves to the year of payment.
- MSMED interest on late payment is payable to the supplier and never deductible.
- Reporting: Form 3CD clause 22 for FY 2025-26, Form 26 from tax year 2026-27, and MSME Form I for companies.
Which Suppliers Are Covered by Section 43B(h)?
Section 43B(h) covers suppliers that are micro or small enterprises under the MSMED Act, in practice those registered on the Udyam portal as micro or small manufacturing or service enterprises. Medium enterprises, traders and unregistered suppliers generally fall outside it.
Micro enterprise
Manufacturing or services, registered on Udyam as micro
Small enterprise
Manufacturing or services, registered on Udyam as small
Medium enterprise
Outside section 15 of the MSMED Act
Udyam trader
Registration treated as limited to priority sector lending
Unregistered supplier
Status hard to establish; get a written declaration
| Category | Investment in plant, machinery or equipment | Turnover |
|---|---|---|
| Micro | Up to ₹2.5 crore | Up to ₹10 crore |
| Small | Up to ₹25 crore | Up to ₹100 crore |
Classification follows the supplier's Udyam record, not the buyer's own assessment. Suppliers who are not yet registered can be pointed to our pages on MSME registration and Udyam registration.
How Do You Count the 15 or 45 Days?
The clock starts on the day of acceptance of the goods or services, not on the invoice date. The due date is the agreed date, capped at 45 days from acceptance, or 15 days where there is no written agreement.
- Acceptance: the day goods or services are delivered or, if the buyer objects in writing within 15 days, the day the supplier removes the objection.
- Deemed acceptance: if there is no written objection within 15 days, the delivery day counts.
- Written agreement: the due date is the agreed date, capped at 45 days. A 60- or 90-day credit term does not extend the cap.
- No written agreement: the due date is 15 days from acceptance.
- Records: track the acceptance date on the goods receipt or service completion note, not only the invoice date.
How Does the Section 43B(h) Disallowance Work at Year-End?
The disallowance applies only where an amount is still outstanding at year-end and is then paid after its MSMED due date. A late payment made within the same year is still deductible that year, although interest is payable. The examples below use a year ending 31 March 2026.
| Example | Due date | Paid on | Result |
|---|---|---|---|
| Accepted 10 Mar 2026; written 45-day terms | 24 Apr 2026 | 20 Apr 2026 | Deductible Paid on time: deductible in FY 2025-26 |
| Accepted 10 Mar 2026; written 45-day terms | 24 Apr 2026 | 5 May 2026 | Disallowed Late and unpaid at year-end: disallowed in FY 2025-26; deductible in tax year 2026-27 |
| Accepted 1 Feb 2026; written 45-day terms | 18 Mar 2026 | 25 Mar 2026 | Deductible Late but paid in the year: deductible in FY 2025-26; MSMED interest payable |
| Accepted 25 Mar 2026; no written agreement | 9 Apr 2026 | 15 Apr 2026 | Disallowed Late: disallowed in FY 2025-26; deductible in tax year 2026-27 |
| Medium enterprise or trader supplier | Contract terms | Any date | Not applicable Section 43B(h) does not apply |
The relief that lets other section 43B items, such as statutory dues, be paid by the return due date does not extend to clause (h). Paying a disallowed MSME invoice in April or May does not bring the deduction back into the earlier year.
⚠️ Interest is a separate 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 RBI. Under section 23, that interest is not deductible for income tax, and it must be reported in the tax audit report even when the principal is deductible.
What Should a Section 43B(h) Compliance Checklist Include?
A working checklist covers four stages: the vendor master, contracts, day-to-day tracking, and year-end review with reporting. Tick each item for every flagged supplier.
- Collect each supplier's Udyam certificate or signed MSME declaration.
- Record the Udyam number, micro, small or medium status, activity type and date checked.
- Flag micro and small manufacturing and service suppliers in the accounting system.
- Recheck status every year and on any change notice.
- Put payment terms of 45 days or less in writing for flagged suppliers.
- Avoid open-ended terms, which default to the 15-day limit.
- Align purchase orders and vendor portals with the written terms.
- Capture the acceptance date on each goods receipt or service completion.
- Calculate the MSMED due date automatically from that date.
- Run a weekly or monthly ageing of flagged suppliers by due date, not invoice date.
- Record disputes and objections in writing.
- Before 31 March, list flagged dues that will pass their due date after year-end; pay or plan for the disallowance.
- Compute the disallowance and MSMED interest and reconcile them with the tax audit report.
- Companies: file MSME Form I by 30 April and 31 October and disclose MSME dues in the financial statements.
Where a business needs help building the ageing report or reviewing year-end dues, a tax health check is a sensible starting point.
How Are MSME Payments Reported?
MSME payments are reported in the tax audit report and, for companies, in a half-yearly MCA return. From tax year 2026-27 the tax audit moves to a new form under the Income-tax Act, 2025.
| Report | Who files | What it shows | When |
|---|---|---|---|
| Form 3CD, clause 22 (revised from 1 April 2025) | Businesses under tax audit, FY 2025-26 | Amounts payable to micro and small enterprises, paid within and beyond the section 15 limit, and MSMED interest | With the tax audit report |
| Form 26 under section 63, Income-tax Act, 2025 | Businesses under tax audit, tax year 2026-27 onwards | Replaces Form 3CD; final MSME clause wording to be confirmed | With the tax audit report |
| MSME Form I | Companies | Dues to micro and small suppliers outstanding for more than 45 days | Half-yearly, by 30 April and 31 October |
For audit scope and timelines, see our page on the tax audit under the Income Tax Act. Missing the audit itself carries a separate section 271B penalty, and any notice raised after an MSME disallowance can be handled through our notice reply and assessment support.
📋 Note: This article is general information based on the law and published sources as of 30 October 2026. It is not professional advice. Treatment depends on contracts, supplier status and facts; consult a Chartered Accountant before acting.
What Should Businesses Watch Into 2027?
Several points are still settling as the Income-tax Act, 2025 takes effect.
- Form 26 wording. The final clause on MSME payments for tax year 2026-27 audits.
- The 45-day rule. Any change to the limit; the July 2026 Rajya Sabha reply announced none.
- CBDT clarifications. Guidance on traders, capital goods and supplier status, which are still debated.
- MCA disclosures. Changes to MSME Form I or financial statement disclosure requirements, published on the MCA portal.
For Queries on Section 43B(h)
The Classic Partners LLP, Chartered Accountants, Andheri East, Mumbai, advises businesses on income tax, GST, audit and compliance. If you have a question about any step in this checklist, you can reach the firm using the details below.
Phone: +91 98218 32683 · Email: info@theclassicpartners.com · Contact page
What Are the Most Asked Questions About Section 43B(h)?
What is section 43B(h)?
Section 43B(h) of the Income-tax Act, 1961, added by the Finance Act, 2023 from assessment year 2024-25, allows a deduction for amounts payable to micro and small enterprises only on actual payment, if they are paid after the time limit in section 15 of the MSMED Act, 2006. If paid within the time limit, the normal accrual basis applies.
Which suppliers does section 43B(h) cover?
Suppliers that are micro or small enterprises under the MSMED Act, in practice those registered on the Udyam portal as micro or small manufacturing or service enterprises. Medium enterprises are outside it. Traders registered on Udyam are generally treated as outside the MSMED Act's delayed payment provisions, so 43B(h) is not usually applied to them.
What is the payment deadline under the MSMED Act?
Section 15 of the MSMED Act requires payment by the date agreed in writing, which cannot be more than 45 days from the day of acceptance or deemed acceptance of the goods or services. If there is no written agreement, payment is due within 15 days of acceptance.
Is a payment made late but within the same financial year disallowed?
No. If the amount is paid before the year ends, the deduction is allowed in that year even though it was late. The buyer is still liable for interest under the MSMED Act, and that interest is not deductible.
What happens to amounts unpaid at year-end?
If an amount is outstanding at year-end and is paid after the MSMED deadline, the expense is disallowed for that year and allowed in the year of actual payment. The relief that lets other 43B items be paid by the return due date does not apply to clause (h).
Does section 43B(h) apply to presumptive taxpayers?
Generally not in practice. Where income is computed on a presumptive basis, such as under section 44AD, expenses are not separately deducted, so there is nothing to disallow. Check the position for the specific scheme and year.
Does it apply to purchases of capital goods?
Section 43B covers sums otherwise allowable as a deduction, so it is generally applied to revenue expenses such as raw materials and services. The treatment of capital purchases and depreciation is debated; take advice on significant capital purchases from MSME suppliers.
What is section 43B(h) called under the Income-tax Act, 2025?
The rule continues under the Income-tax Act, 2025, which applies from tax year 2026-27. Published commentary reports it as section 37(2)(g). Tax audit reports for tax year 2026-27 onwards use Form 26 under section 63, which replaces Form 3CD.
How are MSME payments reported?
In two main places: the tax audit report, where clause 22 of Form 3CD (revised from 1 April 2025) reports amounts payable to micro and small enterprises, the amount paid within and beyond the section 15 time limit, and MSMED interest; and, for companies, MSME Form I, filed half-yearly with the MCA by 30 April and 31 October, which reports dues to micro and small suppliers outstanding for more than 45 days.
How should a business confirm a supplier's MSME status?
Collect the Udyam registration certificate or a signed declaration from each supplier, check the Udyam number, the micro or small classification and the activity type, and record the date checked. Recheck at least once a year, since classifications can change, and require suppliers to report changes.
Related Reading
Disclaimer: This article is for general information only and is not professional advice or a solicitation of work. It reflects the law and published sources as of 30 October 2026.
