Section 43B(h): The 45-Day MSME Payment Rule & Tax Deductions 2026

If your business regularly buys goods or services from small vendors, there's a tax provision that could quietly disallow a chunk of your expense deductions — and most business owners only discover it during ITR review, when it's too late to fix. Section 43B(h) of the Income Tax Act, 1961, inserted by the Finance Act 2023 and effective from FY 2023-24, mandates that payments to Micro and Small Enterprise (MSME) suppliers must be settled within the time limits prescribed under the MSMED Act, 2006 — typically 15 days without a written agreement, or 45 days with one. Miss that window, and the unpaid amount is disallowed as a deductible expense for that year.

This is not a procedural technicality. For a business with ₹50 lakh in outstanding MSME creditors at year-end, the disallowance adds ₹50 lakh back to taxable income — translating to additional tax of ₹15–20 lakh depending on your effective rate. With ITR filing for FY 2025-26 (AY 2026-27) now open and the July 31 deadline approaching for non-audit cases, this is the provision every SMB owner and CA needs to run a hard check on before submitting returns.

What Section 43B(h) Actually Says

Section 43B of the Income Tax Act lists certain payments that are deductible only on actual payment — not on accrual basis. Before the Finance Act 2023, this section covered taxes, employee contributions to PF/ESI, and similar government dues. The Finance Act 2023 added clause (h): any sum payable to a Micro or Small Enterprise beyond the time limit under Section 15 of the MSMED Act, 2006 is deductible only in the year of actual payment.

Section 15 of the MSMED Act sets the payment obligation:

• No written agreement: Payment must be made within 15 days of acceptance or deemed acceptance of goods/services.
• Written agreement exists: Payment must be made within 45 days of acceptance — this is the absolute cap, regardless of what your contract says.

That 45-day cap is non-negotiable. Even if your purchase order or contract specifies "net 60 days" or "net 90 days," that clause is unenforceable against an MSME supplier, and the Income Tax Act treats the invoice as overdue beyond day 45. Your deduction is at risk the moment you cross that threshold without paying.

Who Qualifies as an MSME? The Udyam Registration Check

Section 43B(h) applies only to enterprises registered on the Udyam Registration Portal (udyamregistration.gov.in) as Micro or Small enterprises. Medium enterprises are currently excluded. Your first step is verifying which vendors hold a valid Udyam registration.

Under the revised MSME classification (effective July 2020):

Before your year-end closing, collect Udyam Registration Certificates from every vendor who could qualify. If a vendor cannot produce a valid Udyam certificate, Section 43B(h) does not apply to that vendor. Keep all verification records — in scrutiny, you need documented proof of which vendors were or were not registered as MSMEs.

How the Disallowance Works — ₹ Examples

Example 1: Standard Overdue Payment

Your company, ABC Pvt. Ltd., purchases raw materials worth ₹8 lakh from XYZ Enterprises (a registered Micro enterprise) on March 1, 2026. A written agreement exists with 60-day payment terms. Under Section 43B(h), those 60-day terms are irrelevant — the deadline is March 1 + 45 days = April 15, 2026.

If ABC pays on June 1, 2026 (FY 2026-27), the ₹8 lakh is not deductible in FY 2025-26. It must be added back in the tax computation for AY 2026-27. It becomes deductible only in FY 2026-27, when actually paid.

Tax impact: At a 25% corporate tax rate plus surcharge and cess (~26% effective), ₹8 lakh in disallowance costs approximately ₹2.08 lakh in extra tax for FY 2025-26, plus interest under Sections 234B and 234C if advance tax was underpaid.

Example 2: Year-End Creditor Audit

Mehta Textiles, a proprietorship with ₹3 crore annual turnover, has three MSME suppliers with a combined outstanding payable of ₹22 lakh as of March 31, 2026. All three invoices arrived in February and early March 2026 and remain unpaid beyond the 45-day window.

The entire ₹22 lakh is disallowed in FY 2025-26. At a 30% effective rate (for higher-bracket proprietorships, including surcharge and cess), the additional tax burden is approximately ₹6.6 lakh. When the CA prepares Mehta's ITR-3, this disallowance must be explicitly reflected in the income computation schedule.

The Late-March Invoice Trap

Invoices received in late March 2026 from MSME vendors give you a 45-day window that extends into May 2026. A March 25 invoice gives you until May 9, 2026 to pay. If payment cleared by May 9, the deduction stands in FY 2025-26. If payment came after that date, the amount moves to FY 2026-27. Review each invoice date individually — a blanket assumption that all March-end payables are automatically at risk will overstate your disallowance.

Action Checklist for CAs and Business Owners

Step 1 — Export your creditor ledger

Pull all vendor payables as of March 31, 2026 from your accounting system. Include all unpaid invoices from FY 2025-26, not just those from the final quarter.

Step 2 — Flag potential MSME vendors

Identify suppliers likely to qualify: small manufacturers, traders, and service providers with sub-₹50 crore turnover. Sort by outstanding balance to prioritise material exposures first.

Step 3 — Verify Udyam status

Collect Udyam Registration Certificates from each flagged vendor. Cross-verify on udyamregistration.gov.in using the vendor's Udyam number. Record the verification date — the audit trail matters if the assessment is reopened later.

Step 4 — Calculate the disallowance

For each confirmed MSME vendor with outstanding invoices, determine:

• Invoice date or acceptance date (whichever is later)
• Add 15 days (no agreement) or 45 days (written agreement)
• If that resulting date falls before March 31, 2026 and payment was not made — the invoice amount is disallowed in FY 2025-26

Step 5 — Add back in your tax computation

Total disallowed amounts are added to net profit in the income computation worksheet under "Amounts disallowed u/s 43B." This increases taxable income for FY 2025-26 and affects both tax payable and any advance tax interest liability.

Step 6 — Build forward payment controls

Going into FY 2026-27, tag MSME vendors in your accounts payable system. Set a 40-day reminder for any MSME-tagged invoice — that gives your team a 5-day buffer before the statutory 45-day deadline.

Common Mistakes to Avoid

Assuming email or WhatsApp terms count as a written agreement

The 15-day default applies when no written agreement exists. An email chain or WhatsApp message saying "we'll pay in 60 days" is not a formal written agreement under the MSMED Act. And even if it qualified, the MSMED Act caps payment periods at 45 days regardless. Informal payment understandings provide zero protection under Section 43B(h).

Ignoring vendors not yet on Udyam

Section 43B(h) does not apply to a vendor without Udyam registration. However, vendors can register at any point during the year. A supplier who registers in December 2025 brings Section 43B(h) exposure from that date onward. Run Udyam verification quarterly, not just at year-end.

Thinking "paid in April, so the deduction is safe for FY 2025-26"

April payment of a January invoice means the deduction moves to FY 2026-27 — it does not mean you avoid the disallowance in FY 2025-26. The deduction shifts forward; it does not disappear. For businesses with tight advance tax positions, this shift increases the FY 2025-26 liability and may trigger interest under Section 234B.

Confusing Section 43B(h) with MSME Samadhaan complaints

MSME Samadhaan is a portal where MSME sellers file delayed payment complaints. Section 43B(h) is a tax disallowance provision. The supplier does not need to file any complaint for the disallowance to apply to you. Assessing Officers are cross-referencing creditor ageing schedules against Udyam records during scrutiny assessments.

Skipping documentation

If you believe a creditor is not MSME-registered, document that fact at the time of the transaction. During scrutiny, the burden of proof lies with you as the buyer. A retrospective claim that "we didn't know they were MSME" rarely holds up without contemporary verification records.

Key Takeaways

• Section 43B(h) disallows expense deductions for payments to registered Micro and Small enterprises not settled within 15 days (no agreement) or 45 days (written agreement) of delivery or invoice acceptance.
• The 45-day cap is absolute — no contract clause can extend it, and the provision has applied since FY 2023-24 with no grandfathering of older payment terms.
• Disallowed amounts are added back to taxable income in FY 2025-26 (AY 2026-27) and become deductible only in the year of actual payment.
• For a business with ₹50 lakh in overdue MSME creditors, the tax cost at a 30% effective rate exceeds ₹15 lakh — plus interest under Sections 234B and 234C.
• Verify every material vendor's Udyam registration status, document the outcome, and build forward payment controls before FY 2026-27 progresses further.

How corpus Helps

corpus lets you mark vendors with their Udyam registration status directly in the supplier master. Once tagged, the payables dashboard tracks invoice age for each MSME vendor and flags any bill approaching the 40-day mark — giving your accounts team a 5-day buffer before the statutory deadline. At year-end, corpus generates a Section 43B(h) disallowance report in one click: a clean export of every MSME-vendor invoice that aged beyond the permitted window, with invoice date, due date, and outstanding amount, ready to plug directly into your income tax computation worksheet.

Ask your CA to run the Udyam vendor audit in corpus today — catching ₹10 lakh in recoverable deductions saves more than ₹3 lakh in tax before your July 31 ITR deadline.