Ankeshan

What is Section 43B(h)?

Last updated: 27 June 2026

Section 43B(h) of the Income Tax Act is a provision that denies a buyer's income-tax deduction for expenses incurred on purchases from Micro or Small enterprises if payment is not made within the time limit prescribed by the MSMED Act — 15 days (without agreement) or 45 days (with a written agreement) — until the amount is actually paid.

Inserted by Finance Act 2023 and effective from AY 2024-25 (i.e., FY 2024-25 onward), it is now fully operational for FY 2025-26. The rule creates a direct tax incentive for large buyers to pay their MSME suppliers on time.

How it works in practice

A manufacturing company buys components from a Udyam-registered Micro enterprise. They have a written agreement specifying a 45-day payment cycle. If the bill remains unpaid at 31 March (financial year-end), the expense is disallowed for that year's income tax computation. The deduction is allowed only in the year when payment is actually made.

Fact box. The interest penalty is separate and additional. Under MSMED Act Section 16, delayed payments also attract compound interest at three times the RBI bank rate — and this penal interest is itself not deductible under Section 23 of the MSMED Act.

Critical scope limits — who is NOT covered

  • Medium enterprises are excluded. Section 43B(h) applies only to payments to Micro and Small enterprises.
  • Unregistered MSEs are excluded. The supplier must hold a valid Udyam Registration Certificate. Payments to small businesses without Udyam registration are not covered.
  • Traders are excluded. The MSME supplier must be a manufacturer or service provider. A Udyam-registered trading enterprise does not attract this provision.

What buyers should do

  1. Identify all Udyam-registered Micro and Small suppliers in your vendor master.
  2. Check whether they are manufacturers/service providers (not traders).
  3. Ensure payment within 45 days (or 15 days if no written agreement).
  4. Maintain a register of outstanding MSME payables at year-end for tax-audit purposes.

Frequently asked questions

Does Section 43B(h) apply if the buyer is also an MSME? Yes. The provision applies to all buyers (large or small) who claim a deduction on payments to Micro/Small enterprises. Being an MSME buyer does not exempt you.

What is the 15-day vs 45-day rule? If there is no written agreement between buyer and supplier, the MSMED Act mandates payment within 15 days. If a written agreement exists, the limit is up to 45 days — it cannot contractually be extended beyond 45 days, and any clause trying to do so is void under MSMED Act Section 15.

Sources: Ministry of MSME; Income Tax Act, Section 43B(h); MSMED Act, 2006 (Sections 15, 16)

General information, not professional advice. Verify on the official portal for your case. Reviewed by a Chartered Accountant; last updated 27 June 2026.

Related: Udyam Registration · TDS · Advance Tax