Section 43B — Tax Deductions Only on Actual Payment Basis

Section 43B of the Income Tax Act overrides the mercantile accounting system — certain specified deductions are allowed only on the basis of actual payment, regardless of when the liability accrued. If the payment is made before the due date of filing the income tax return, the deduction is allowed in the year of accrual. Otherwise, it's allowed only in the year of actual payment. Here is the complete guide.

Expenses Covered Under Section 43B

• Statutory levies: Any tax, duty, cess or fee payable under any law — allowed only on actual payment
• Employer contributions to PF, ESI, gratuity fund, approved funds: Allowed only when actually paid — not merely accrued or provided in books
• Bonus and commission to employees: Allowed only on actual payment
• Interest on loans from Public Financial Institutions, banks, SFCs: Allowed only when actually paid — accrued but unpaid interest is disallowed
• Interest on loans converted to equity: Depends on timing of conversion
• Leave encashment: Allowed only on actual payment to employees
• Payments to railways for use of assets: On actual payment basis

MSME Amendment — Finance Act 2023

• Payments to MSMEs: Finance Act 2023 added a new clause — if a business buys goods/services from a MSME and does not pay within the time specified under MSMED Act (45 days for MSME suppliers with written agreement; 15 days without agreement), the unpaid amount is disallowed until actually paid
• Effective from AY 2024-25 — this is a major new disallowance for businesses dealing with MSME vendors

The "Due Date" Exception

• For PF, ESI and other statutory payments: If paid before the due date for filing the ITR (typically July 31 or September 30), the deduction is allowed in the year of accrual even if the actual payment happened after the financial year end (but before ITR filing date)
• This exception gives a grace period — but only up to the ITR due date, not beyond

Consequences of Disallowance

• The disallowed amount is added back to taxable income — increasing the tax liability for the year
• The deduction becomes available in the subsequent year when the actual payment is made
• Interest and penalty for underpayment of advance tax due to the disallowance-related income increase

Conclusion

Section 43B mandates actual payment for critical deductions — PF, ESI, bonus, loan interest and now MSME payments. SPOTON provides income tax advisory, Section 43B compliance review and corporate ITR filing for businesses in Kerala. Contact us for expert corporate tax compliance services.