Identify the governing tax year and supplier
Section 43B(h) of the Income-tax Act, 1961 applies from AY 2024–25, beginning with FY 2023–24. It applies to a qualifying amount otherwise deductible in computing business income when it is payable to a micro or small enterprise beyond the section 15 time limit under the MSMED Act. Deduct it in the year of actual payment. The general concession for payment by the return due date excludes clause (h). For tax years starting on or after 1 April 2026, check section 37(1), (2)(g) and (3) of the Income-tax Act, 2025 and the savings in section 536. The same exclusion from the return due date concession is in section 37(3). Medium enterprises are outside this particular income-tax payment rule.
Check the supplier’s status, activity, registration and dates for the relevant transaction. Ministry guidance limits Udyam registration for retail and wholesale trading to priority sector lending and excludes delayed payment benefits for traders registered on that basis. An Udyam number for trading alone is not sufficient to establish Chapter V coverage. Check the activity behind the supply if the vendor also manufactures or provides qualifying services.
| Category | Investment and turnover ceilings from 1 July 2020 to 31 March 2025 (₹ crore) | From 1 April 2025 (₹ crore) |
|---|---|---|
| Micro | 1 and 5 | 2.5 and 10 |
| Small | 10 and 50 | 25 and 100 |
| Medium | 50 and 250 | 125 and 500 |
Both investment and turnover matter under the notified classification, including relevant exclusions and transition rules. The MSMED (Amendment) Act, 2026 provisions commencing on 15 October 2026 revised the statutory classification framework and replaced section 8 with provisions for voluntary digital registration. They did not replace the section 15 payment window or section 16 interest rule. The separate new section 15A addresses settlement of MSME invoices through TReDS for Central public sector enterprises and entities notified under its provisions. Do not apply it as a general mandate for every buyer or treat routing as proof of actual settlement. Verify any prescribed procedure and notifications relevant to the buyer. Section 22 financial-statement disclosures, and the related enforcement provisions, are separate from the income-tax deduction.
Find the acceptance date and contractual deadline
| Terms | Payment requirement | Evidence |
|---|---|---|
| Written agreement | Pay by the agreed date, subject to the 45-day ceiling from acceptance or deemed acceptance. A shorter written term controls. | Contract or agreed purchase terms, delivery or service evidence, and payment proof. |
| No written agreement | Pay before the appointed day: the day immediately after expiry of 15 days from acceptance or deemed acceptance. | Confirm absence of written terms and record the acceptance calculation. |
| Timely written objection | If the buyer objects in writing regarding acceptance within 15 days of delivery or service, use the date the supplier removes the objection as provided in section 2(b). | Delivery record, written objection, corrective action and evidence of removal. |
If there is no qualifying written objection, deemed acceptance refers to the original delivery or service date. An invoice date is not a substitute for acceptance evidence. Document later payments before signing the tax computation: an amount within time on 31 March must still be tracked to see whether it was ultimately paid by the statutory deadline. Separate late amounts paid in the same year, timely amounts paid next year and late amounts paid next year. Review uncertain cases on their facts rather than assuming that any 31 March ageing report settles the tax result.
Three year-end timing examples
Assume each invoice date equals acceptance, the written term is 45 days, and the expense is otherwise deductible.
| Accepted | Due | Paid | Deduction in FY 2023–24 |
|---|---|---|---|
| 10 May 2023 | 24 June 2023 | 15 November 2023 | Yes: 144 days late, but actually paid in the same financial year. Assess section 16 interest separately. |
| 18 March 2024 | 2 May 2024 | 15 April 2024 | Yes: payment within the statutory time; the actual-payment restriction in clause (h) is not triggered. |
| 12 January 2024 | 26 February 2024 | 20 April 2024 | No: deduct in FY 2024–25 on actual payment, subject to eligibility. |
Interest and tax audit disclosure
Under section 16, interest on covered late principal accrues at three times the RBI Bank Rate with monthly rests, from the appointed day or the day immediately after the agreed due date as applicable. Use the Bank Rate, not the repo rate. Track rate changes, dates and partial payments where relevant. Section 23 bars deduction for interest paid or payable under this Act. Keep it separate from principal that may be deductible later.
Use the tax audit form version applicable to the reporting period. The historical March 2024 Form 3CD amendment placed inadmissible interest and clause (h) disallowance in clause 22. The version amended from 1 April 2025 asks in clause 22 for inadmissible interest, total section 15 amounts and specified breakdowns for timely payments and amounts inadmissible for the year. Check clause 26(A) for prior-year disallowed balances and payment; its current-year return-date test excludes clause (h). Reconcile late amounts paid in the same year without adding them back solely for being late, and do not double-count the same amount across reporting or tax computation. Forms 3CA or 3CB with 3CD continue for the 1961 Act through AY 2026–27. For tax year 2026–27 onward under the 2025 Act, check Form 26 under Rule 47 and section 63, with supplier payment and interest particulars reconciled to the applicable form.
Four worked cases
1. Five suppliers and the tax impact
Precision Forgings has ₹65 crore turnover and ₹4.50 crore taxable business profit before these adjustments for FY 2023–24. Assume the stated supplier statuses, accepted dates equal the listed dates, and covered expenses are otherwise deductible. The covered written terms are 45 days.
| Supplier | Accepted and amount | Due or reference date | Payment | FY 2023–24 result under clause (h) |
|---|---|---|---|---|
| Alpha, micro manufacturer | 10 January 2024; ₹18 lakh | 24 February 2024 | 15 May 2024 | ₹18 lakh added back |
| Beta, small manufacturer | 15 February 2024; ₹25 lakh | 31 March 2024 | 22 April 2024 | ₹25 lakh added back: 31 March was the last permitted day; the actual April payment missed it |
| Gamma, pure trader with trading-only registration | 12 January 2024; ₹35 lakh | 26 February 2024 if 45-day commercial terms apply | 10 June 2024 | No addition under clause (h) on the stated facts |
| Delta, small manufacturer | 5 March 2024; ₹14 lakh | 19 April 2024 | 12 April 2024 | No addition: paid within time |
| Omega, medium enterprise | 1 December 2023; ₹50 lakh | 15 January 2024 if 45-day commercial terms apply | Unpaid at close | No addition under clause (h) |
The add-back is ₹43 lakh, taking taxable business profit to ₹4.93 crore. For a valid section 115BAA election on ordinary income, the effective rate is 22% × 1.10 × 1.04 = 25.168%, giving ₹10,82,224 in incremental current tax before statutory rounding of the final amount. Alpha and Beta can reverse on actual payment in FY 2024–25. A DTA of ₹10,82,224 assumes the same rate at reversal, continued deductibility, and that the applicable AS 22 or Ind AS 12 recognition test is met.
2. Registration was disclosed after the invoice
Apex purchased ₹15 lakh of granules on 10 November 2023 from Shanti. The supplier’s micro certificate is dated August 2023 but was shared only on 2 April 2024. Establish the contract and supply dates, qualifying status, accepted delivery, agreed terms and actual payment. An invoice without an Udyam number does not itself create a statutory exemption. If the supplier qualified at the relevant dates and the amount remained unpaid beyond the section 15 deadline at year end, the ₹15 lakh otherwise deductible expense is subject to the actual-payment rule on those assumptions.
Earlier Supreme Court cases including Silpi Industries considered registration timing under Chapter V. In NBCC (India) Ltd. v. State of West Bengal (2025 INSC 54), the Court distinguished those cases and referred the section 18 registration issue for an authoritative decision. That reference concerns the dispute mechanism and should not be presented as deciding the buyer’s income-tax treatment or as creating an invoice-notice requirement. A certificate obtained after supply does not, by itself, establish historical status.
3. Written objection to defective goods
SunTech received ₹22 lakh of frames on 5 February 2024. It detected a 3 mm deviation on 12 February, seven days after delivery, and sent a written acceptance objection on 14 February, nine days after delivery. Assume the supplier remedied it on 26 March and a valid 45-day written term applies. The due date is 10 May 2024. Payment on 28 April is timely, so no clause (h) add-back on these assumptions. Without the written term the payment window would be different.
4. Four full monthly rests
Nova owes ₹10 lakh accepted on 1 October 2023 and due on 15 November under 45-day written terms. It pays the principal on 15 March 2024. The delay is 121 days, treated here as four full monthly rests from 16 November through 15 March. Assume the RBI Bank Rate is constant at 6.75% for the worked illustration; the statutory multiple gives 20.25% annual nominal interest, or 1.6875% per month.
| Monthly rest | Interest (₹, display rounded) | Closing amount (₹, display rounded) |
|---|---|---|
| 16 November–15 December | 16,875 | 10,16,875 |
| 16 December–15 January | 17,160 | 10,34,035 |
| 16 January–15 February | 17,449 | 10,51,484 |
| 16 February–15 March | 17,744 | 10,69,228 |
Using unrounded balances, interest is about ₹69,228. The principal was paid in the same financial year and is separately tested for deduction. Interest is non-deductible under section 23. Verify the actual applicable RBI rate and treatment of partial months or payments for a real claim.
Common review questions
Does paying after 31 March but before filing the return preserve an already late deduction? No. The ordinary return-date concession does not apply. Trace later actual payment and prevent a duplicate deduction.
What if a qualifying business uses presumptive taxation? For the historical 1961 Act, sections 44AD and 44ADA deem profit for eligible receipts; an ordinary separate expense adjustment is generally not made to that deemed profit. Verify eligibility and assess separately computed income and the statute applicable to the year. The payment and interest duties under the MSMED Act are separate.
What about plant and machinery? Where capital cost is not deducted as an expense, do not add back that cost as though it were a revenue deduction. Check any distinct deduction on its own terms. Covered late payment may still generate MSMED interest.
Can the parties extend the payment limit to 90 days? The section 15 written ceiling remains 45 days. Apply the actual shorter term where agreed.
Does handing over a post-dated cheque on 31 March prove payment that day? No. For a cheque dated 15 April, do not assume March payment. Verify the date, honour and applicable payment law before taking the deduction.
Sources
- India Code: MSMED Act, 2006, sections 2, 15, 16, 22 and 23
- Gazette: Finance Act, 2023, insertion of section 43B(h)
- Income Tax Department: Income-tax Act, 1961, sections 43B, 44AD, 44ADA and 115BAA
- Income Tax Department: Income-tax Act, 2025, sections 37 and 536
- Ministry of MSME: Gazette S.O. 1364(E), revised classification
- Ministry of MSME: 1 September 2021 memorandum on the scope of trader registration
- Gazette text: MSMED (Amendment) Act, 2026
- Gazette text: S.O. 5575(E), commencement notification
- Supreme Court: NBCC (India) Ltd. v. State of West Bengal, 2025 INSC 54, reference on section 18
- Gazette text: CBDT Notification 27/2024, historical Form 3CD
- Income Tax Department: amended Form 3CD, clauses 22 and 26
- Income Tax Department: tax audit Form 26 and the transition
- Income Tax Department: section 115BAA rate components