Section 43B(h) MSME Payment Disallowance: Complete Guide with Latest FAQs

Section 43B(h) has become one of the most searched tax-audit topics because it hits the P&L directly for any business that buys from Micro or Small enterprises. Unlike most disallowances, it doesn't turn on how a payment is classified — it turns purely on whether the supplier was paid within a fixed statutory window. Here is where the law currently stands, and answers to the questions Chartered Accountants and businesses ask most often.

What does Section 43B(h) say?

The Finance Act, 2023 inserted clause (h) into Section 43B of the Income-tax Act, 1961, effective from Assessment Year 2024-25 (FY 2023-24). It provides that any sum payable by an assessee to a Micro or Small enterprise, for goods or services, is allowed as a deduction only in the year it is actually paid — if the payment is made beyond the time limit specified under Section 15 of the MSMED Act, 2006, it makes no difference which year the liability was originally incurred in; the deduction simply waits for the year of payment.

Payment time limit under Section 15, MSMED Act

• No written agreement — payment must be made within 15 days of acceptance (or deemed acceptance) of the goods or services.
• Written agreement in place — payment must be made within the period agreed between the parties, but in no case beyond 45 days from acceptance, even if the agreement itself specifies a longer period.

Goods or services are treated as "deemed accepted" if the buyer raises no written objection within 15 days of delivery or completion. The count of days runs from actual or deemed acceptance, whichever applies.

Who is actually covered?

• Only payments to enterprises registered on the Udyam portal as Micro or Small — Medium enterprises fall entirely outside clause (h).
• Only manufacturers and service providers. Retail and wholesale traders, even if Udyam-registered, do not meet the MSMED Act's definition of "supplier", so clause (h) does not apply to dues owed to them.
• The supplier must have been registered as Micro or Small on the date of the transaction — a supplier that registers later does not pull an earlier, already-outstanding invoice into clause (h).
• Only trade payables for goods or services in the ordinary course of business — capital expenditure (fixed asset purchases) stays outside the scope of this clause.

Chasing every vendor ledger for a 15/45-day breach at year-end is not realistic in Excel across a full client portfolio. assureOffice reads your Tally trial balance, flags Micro/Small balances outstanding beyond the statutory limit, and carries the correct add-back straight into the financials and tax computation. Automate your financials with assureOffice →

MSME classification limits have changed — check your vendor list again

The Ministry of MSME revised the investment and turnover thresholds for classifying enterprises, effective 1 April 2025 (Notification S.O. 1364(E) dated 21 March 2025):

• Micro — investment up to ₹2.5 crore (earlier ₹1 crore), turnover up to ₹10 crore (earlier ₹5 crore)
• Small — investment up to ₹25 crore (earlier ₹10 crore), turnover up to ₹100 crore (earlier ₹50 crore)
• Medium — investment up to ₹125 crore (earlier ₹50 crore), turnover up to ₹500 crore (earlier ₹250 crore)

Because the limits have moved up sharply, a number of suppliers who did not qualify as Micro or Small earlier — and some that were earlier Medium — may now fall within Micro/Small. It's worth re-checking Udyam registration status for larger vendors rather than assuming clause (h) doesn't apply to them.

Practical Scenarios (With Examples)

The rule reads simply, but most confusion comes from real situations at year-end. Here are the scenarios that come up most often, worked through with actual dates.

Scenario 1: We paid before the ITR due date — is the deduction saved?

Situation: A ₹5,00,000 due to a Micro enterprise was outstanding beyond the 45-day limit as on 31 March 2026. It was paid in full on 20 July 2026 — well before the ITR due date of 31 October 2026. Can the deduction still be claimed in FY 2025-26?

Answer: No. This is the most common misunderstanding about clause (h). For the rest of Section 43B — say, statutory dues or bonus — paying before the ITR due date protects the deduction for that year. Clause (h) is specifically excluded from that relief. Since the amount was still unpaid on 31 March 2026, it is disallowed in FY 2025-26. Because it was actually paid on 20 July 2026, it becomes deductible in FY 2026-27 instead — the year the money actually moved, not the year the return was filed.

Scenario 2: Is the 45-day check done only as on 31 March, or does it matter what happens up to the audit date?

Situation: The tax audit is usually signed off in July–September, months after the financial year closes. Does the auditor test the payment position as on 31 March, or as on the date the audit report is actually signed?

Answer: Only as on 31 March — the last day of the financial year. Clause (h) asks one question: was the amount actually paid, within the financial year, before or within the 15/45-day limit? What happens after 31 March — the audit being signed in August, or the return filed in October — does not change that answer. If the amount was outstanding beyond the limit on 31 March, it is disallowed for that year regardless of when it is reviewed later. The audit report only records the position as it already stood on the balance sheet date.

Scenario 3: We paid late, but still within the same financial year — any disallowance?

Situation: Goods were accepted from a Micro enterprise on 1 January 2026 with no written agreement, so payment was due by 16 January 2026. Payment actually went out on 20 February 2026 — over a month late, but still well within FY 2025-26 (which ends 31 March 2026).

Answer: No 43B(h) disallowance. The amount was not outstanding as on 31 March — it was incurred and paid off within the same financial year, so there is nothing to defer to a later year. What doesn't go away is the MSMED interest: since payment crossed the 15-day limit, compound interest under Section 16 of the MSMED Act still starts running from day 16, and that interest, if payable, is permanently non-deductible under Section 23 — a separate issue from the 43B(h) timing question.

Scenario 4: Goods were received close to year-end — has the credit period even expired by 31 March?

Situation: Goods were accepted from a Micro enterprise on 20 March 2026, no written agreement, and the invoice was still unpaid as on 31 March 2026.

Answer: No disallowance for FY 2025-26. The 15-day limit for this invoice runs out only on 4 April 2026 — after the year has already closed. As on 31 March 2026, the statutory time limit had not yet expired, so this amount is not yet "beyond the time limit" on the balance sheet date. It stays a normal current liability for FY 2025-26. If it later stays unpaid past 4 April and is still unpaid on 31 March 2027, it would then be disallowed in FY 2026-27.

Scenario 5: Part of the invoice was paid on time, the rest late — is the whole invoice disallowed?

Situation: An invoice of ₹10,00,000 was raised by a Small enterprise. ₹6,00,000 was paid within the 45-day limit; the remaining ₹4,00,000 was still outstanding as on 31 March, well past the limit.

Answer: Only the ₹4,00,000 that was actually outstanding beyond the time limit as on 31 March gets disallowed. The ₹6,00,000 already paid within time is unaffected. Clause (h) looks at what remains payable and overdue on the balance sheet date, not the original invoice value.

Scenario 6: The due stays unpaid for more than one year — is it disallowed every year until paid?

Situation: A ₹2,00,000 due was disallowed in FY 2025-26 because it was outstanding beyond the limit as on 31 March 2026. It is still unpaid as on 31 March 2027.

Answer: Yes, it is added back again in FY 2026-27 — because it is once again outstanding beyond the statutory limit on that year's balance sheet date. This continues every year the amount stays unpaid. The deduction is finally allowed only in the year the ₹2,00,000 is actually paid; it does not automatically carry forward the moment a new year begins, since each year-end position is tested afresh.

Scenario 7: The written agreement gives 60 days, but payment went out on day 50 — is that within limit?

Situation: A purchase order with a Small enterprise states a 60-day credit period. Payment was made on day 50 — within the agreement, but beyond the statutory 45 days.

Answer: The statutory cap under Section 15 of the MSMED Act is 45 days, and no agreement can extend it — a 60-day clause in a purchase order has no effect on this timeline. Since payment went out on day 50, and this was before the following 31 March, there is no 43B(h) disallowance either (same logic as Scenario 3). But MSMED interest under Section 16 still applies from day 46 onward, because the delay is measured against the statutory 45 days, not the agreement's 60 days.

Interest on delayed payment is never deductible

Interest payable under Section 16 of the MSMED Act for a delayed payment is disallowed under Section 23 of that Act — permanently, not as a timing difference like the principal amount. It should be added back and cannot be claimed as a deduction in any year.

Reporting in the tax audit report

Section 43B(h) disallowance is reported in Clause 22 of Form 3CD, not Clause 26 — CBDT corrected this through a corrigendum (Notification No. 34/2024 dated 19 March 2024) shortly after the original amendment. Clause 22 requires the amount paid within the Section 15 time limit, the amount not paid within time (and therefore inadmissible), and any MSMED interest that is not an allowable deduction.

What changes with the Income-tax Act, 2025?

For FY 2026-27 onward, tax audits move to the Income-tax Act, 2025. In a Rajya Sabha reply dated 21 July 2026, the Ministry of Finance confirmed that Section 43B(h) of the 1961 Act corresponds to Section 37(2)(g) of the Income-tax Act, 2025 — the substance of the provision, including the 15/45-day MSMED timeline, carries over unchanged; only the section number changes.

Frequently Asked Questions

Does Section 43B(h) apply to Medium enterprises?

No. The clause applies only to Micro and Small enterprises as defined under the MSMED Act. Dues to Medium enterprises are unaffected.

Does it apply to retail or wholesale traders registered on Udyam?

No. Traders can take Udyam registration for limited purposes such as priority sector lending, but they do not meet the MSMED Act's definition of "supplier", so the Section 15 payment timeline — and therefore clause (h) — does not apply to amounts owed to them.

Does it apply to dues outstanding from before FY 2023-24?

No. Clause (h) applies to liabilities incurred from FY 2023-24 (AY 2024-25) onward. A balance genuinely outstanding from before 1 April 2023 is not brought into disallowance merely because it is still unpaid as on a later 31 March.

Does it apply to purchase of capital assets?

No. Clause (h) concerns deduction of a revenue expense. Capital expenditure is not claimed as a Section 43B-type deduction in the first place, so it stays outside this clause.

If the buyer pays before filing the income tax return, is the deduction saved?

No. Unlike clauses (a) to (g) of Section 43B, clause (h) is specifically excluded from the "paid before the Section 139(1) due date" relief. Only actual payment within the previous year saves the deduction for that year.

What if the supplier registers as MSME only after the transaction date?

The generally accepted view is that the supplier's Udyam registration status on the date of the transaction is what matters. If the supplier was not registered as Micro or Small when the goods or services were supplied, clause (h) does not apply to that invoice even if the supplier registers later.

How is the start date counted when there's no formal acceptance certificate?

Goods or services are deemed accepted if the buyer raises no written objection within 15 days of delivery or completion. The 15/45-day count runs from the date of actual or deemed acceptance, whichever applies.

Is the disallowance a permanent loss of deduction?

No, it is a timing difference for the principal amount. The expense is disallowed in the year it should have been paid and becomes deductible in the year it is actually paid — not in any other year.

Is interest on delayed payment to the MSME also just deferred?

No. Interest under Section 16 of the MSMED Act is permanently disallowed under Section 23 of that Act — it is never an allowable business deduction, in any year.

Which clause of Form 3CD is used to report this?

Clause 22, showing the amount paid within the Section 15 time limit, the amount not paid within time (inadmissible under 43B(h)), and any MSMED interest disallowed.

How do the revised MSME classification limits (from April 2025) affect this?

With investment and turnover thresholds raised significantly, more suppliers now qualify as Micro or Small than before. It's worth re-verifying Udyam status for vendors who were earlier assumed to be Medium or outside the MSME definition altogether.

Does a company have any compliance beyond the income-tax disallowance?

Yes. A company with outstanding dues to Micro or Small suppliers beyond 45 days also has to file MSME Form-1 with the Registrar of Companies on a half-yearly basis — a separate Companies Act requirement that runs alongside the income-tax position.

What is the corresponding section under the Income-tax Act, 2025?

Section 37(2)(g), as confirmed by the Ministry of Finance in a Rajya Sabha reply dated 21 July 2026. The underlying rule is unchanged.

Getting this right needs the vendor's Udyam status, the invoice date, the agreed credit period and the actual payment date lined up for every purchase — across the whole year, for every client. assureOffice Financial Builder pulls this directly from Tally, flags what's outstanding beyond the 15/45-day limit as on year-end, and carries the correct 43B(h) add-back into the financials automatically, so nothing gets missed at the tax audit stage.