Section 43B — Deductions Allowed Only on Actual Payment Basis

Under normal accounting, expenses are recorded on an accrual basis — as they are incurred, even if not yet paid. Section 43B overrides this and mandates that certain specified expenses are deductible for income tax purposes only in the year in which they are actually paid — regardless of when they are accrued or provided for in the books. Here is the complete guide.

Expenses Covered Under Section 43B

• 43B(a) — Taxes, duties, cess: GST, customs duty, excise duty, professional tax, any tax or duty payable under any law — deductible only when paid before ITR filing date
• 43B(b) — Employer's contribution to PF/ESI/other employee funds: PF, ESI, gratuity fund, superannuation fund contributions — deductible only when actually deposited with the fund
• 43B(c) — Bonus or commission to employees: Deductible only in the year in which it is actually paid to the employee (not when provided in accounts)
• 43B(d) — Interest on loans from public financial institutions/banks: Deductible only when actually paid (converts to paid basis from accrual basis for bank loans)
• 43B(e) — Leave encashment/leave salary: Deductible only when actually paid to the employee
• 43B(f) — Payment to railways for use of railway assets: Deductible only when paid
• 43B(h) — Payments to MSME suppliers (added by Finance Act 2023): Payments to Micro and Small enterprises must be made within 45 days (or as per agreement, maximum 45 days) — if delayed, deduction is deferred to the year of actual payment

The "Before Due Date of ITR" Exception

An important concession in Section 43B: if the payment is made before the due date of filing the income tax return for that year, the deduction is allowed in that year — even if paid after the year-end. For example, PF for March 2026 paid by October 31, 2026 (ITR due date for audit cases) is deductible in FY 2025-26.

Section 43B(h) — MSME Payment Rule (Critical New Provision)

• Added by Finance Act 2023 — effective from FY 2023-24
• Payments to Micro and Small enterprises (registered under MSMED Act) must be made within 15 days (if no agreement) or 45 days (if written agreement) of receiving goods/services
• If not paid within this period — the expense is disallowed in that year and allowed only in the year of actual payment
• This creates a strong incentive for large companies to pay MSME vendors promptly

Conclusion

Section 43B requires businesses to pay specified expenses — especially PF, taxes, MSME vendor dues and bank interest — before the ITR filing date to claim deductions. SPOTON provides Section 43B compliance advisory as part of tax audit and ITR preparation for businesses across Kerala. Contact us for expert income tax compliance services.