Section 43B(h): MSME Payment Rule and 45-Day Limit Explained

How the MSME Payment Rule Works

Section 43B(h) was inserted into the Income-tax Act, 1961 by the Finance Act, 2023 with effect from 1 April 2024. The amendment first applies to AY 2024-25, which corresponds to FY 2023-24, and continues to apply in subsequent years. 

 It covers amounts payable to micro or small enterprises that remain unpaid beyond the time allowed under Section 15 of the Micro, Small and Medium Enterprises Development Act, 2006.

When the rule applies, the overdue amount is allowed as a tax deduction in the financial year in which it is actually paid.

For example, suppose a business records an eligible purchase expense in FY 2025-26 but the payment becomes overdue under the MSMED Act and is still unpaid on 31 March 2026. The deduction may have to be deferred until the year in which payment is actually made.

Which Income-Tax Law Applies in 2026?

The Income-tax Act, 2025 came into force on 1 April 2026. However, the Income Tax Department's transition guidance confirms that tax years beginning before 1 April 2026 continue to be governed by the Income-tax Act, 1961. Returns for AY 2026-27 are therefore filed under the old Act.

Section 37(2)(g) of the new Act carries forward the same basic payment rule for amounts payable to micro and small enterprises beyond the Section 15 deadline. Section 37(3) also excludes these payments from the normal relief available when certain liabilities are paid before the income-tax return due date.

Therefore, FY 2025-26 continues to be governed by the corresponding provision under the Income-tax Act, 1961.

MSME Classification Limits for FY 2026-27: Which Enterprises Are Covered?

Under Section 7 of the MSMED Act, enterprises are classified using both investment and annual turnover. The current limits were notified on 21 March 2025, took effect on 1 April 2025 and continue to apply in FY 2026-27.

Both the investment and turnover conditions matter. For example, turnover of ₹80 crore alone does not automatically make an enterprise a small enterprise. Its investment in plant and machinery or equipment must also remain within the applicable ₹25 crore limit.

The tax provision covers micro and small enterprises. Medium enterprises are outside its scope. The buyer's own MSME status or size does not determine whether the rule applies. It can apply to any buyer claiming an eligible business deduction for an amount payable to a covered micro or small enterprise. 

Udyam Details and Supplier Status

Businesses should collect and maintain current Udyam details for relevant suppliers so that their MSME classification can be identified correctly. The MSMED Act's definition of a supplier refers to a micro or small enterprise that has filed the prescribed memorandum.

This is especially important after the classification limits changed in April 2025. Vendor records created under the older limits may no longer reflect the supplier's current category.

Are Wholesale and Retail Traders Covered?

Retail and wholesale traders have been allowed to register on the Udyam portal since 2 July 2021. This was clarified through Office Memorandum No. 5/2(2)/2021-E/P & G/Policy dated 2 July 2021.  However, the Government restricted the benefits available to them to Priority Sector Lending.

As a result, pure retail and wholesale trading businesses are generally treated as outside the delayed-payment protection available under the MSMED Act.

If a supplier carries on both trading and manufacturing or service activities, its actual business activity and the nature of the transaction should be checked rather than relying only on the business name or Udyam number.

How Do the 15-Day and 45-Day Payment Limits Work?

Section 15 of the MSMED Act sets different payment rules depending on whether the buyer and supplier have agreed to payment terms in writing.

This means a buyer does not automatically get 45 days. If a purchase order specifies payment within 30 days, the 30-day term applies. A longer written term such as 60 or 90 days cannot extend the statutory limit beyond 45 days.

When Does the Payment Period Start?

The payment period is linked to the day of acceptance or day of deemed acceptance of the goods or services. It does not automatically start from the invoice date. The day of acceptance is normally the date on which the goods are delivered or the services are rendered.

If the buyer raises a written objection regarding the goods or services within 15 days, the relevant acceptance date becomes the date on which the supplier resolves that objection.

If no written objection is raised within those 15 days, the actual date of delivery or rendering of services becomes the day of deemed acceptance. This distinction matters when an invoice is issued before or after the actual supply date.

The date the amount becomes due is the agreed date, provided the written agreement does not allow more than 45 days from acceptance or deemed acceptance. If there is no written agreement, payment is due before the appointed day, which is the day immediately after 15 days from acceptance or deemed acceptance.

How Do Year-End Payments Affect the Tax Deduction?

Consider an eligible purchase of ₹8 lakh where the goods are accepted on 10 February 2026 and the written payment term is 45 days. The payment deadline is 27 March 2026.

The second situation is often misunderstood. The buyer has missed the MSMED payment deadline, so delayed-payment interest may arise. However, for the income-tax deduction, the overdue amount has still been actually paid during FY 2025-26.

Now consider a different invoice where the goods are accepted on 20 March 2026 with a valid 45-day payment term. The deadline falls on 4 May 2026.

If that invoice is still unpaid on 31 March, the payment period has not yet expired. The amount is outstanding, but it is not yet overdue for this purpose.

Does Paying Before the ITR Due Date Help?

Not if an eligible MSE payment had already become overdue and remained unpaid at the end of the financial year.

For most liabilities covered by Section 43B, payment made before the income-tax return due date can still preserve the deduction for the earlier financial year. Clause (h) is specifically excluded from this relief.

For example, suppose an MSE payment became overdue in March 2026 and remained unpaid on 31 March 2026. Paying it in July 2026 before filing the return does not restore the deduction for FY 2025-26. It becomes deductible in the year of actual payment.

What Interest Applies to Delayed MSME Payments?

The income-tax disallowance is separate from the interest liability under the MSMED Act. Section 16 of the MSMED Act makes the buyer liable to pay compound interest with monthly rests at three times the RBI Bank Rate when payment is not made within the Section 15 deadline. The statutory interest applies notwithstanding a different agreement between the buyer and supplier.

RBI raised the Bank Rate to 5.75% on 7 October 2026. Delayed-payment interest under Section 16 is therefore 17.25% per year, compounded monthly. The Bank Rate can change when RBI revises its policy rates, so check the rate that applied during the overdue period before calculating the final amount.

For example, if ₹1 lakh remains overdue for three full months at an annual rate of 17.25% compounded monthly, the interest accrued is approximately ₹4,375. Simple interest for the same period would be ₹4,312.50, but Section 16 requires interest to be compounded monthly.

Note: This is only an illustration. The actual interest will depend on the applicable RBI Bank Rate and the exact period of delay.

Section 23 of the MSMED Act also states that interest paid or payable under these delayed-payment provisions is not allowed as an income-tax deduction.

How Are MSME Payments Reported in Form 3CD?

CBDT revised Form 3CD through Notification No. 23/2025, dated 28 March 2025, effective from 1 April 2025. The revised forms were subsequently enabled on the Income Tax e-Filing portal. Under the revised Clause 22, tax-audit reporting covers:

For example, if ₹12 lakh was required to be paid to eligible MSE suppliers during the year, ₹9 lakh was paid within the Section 15 time limit and ₹3 lakh remained overdue and unpaid, Clause 22 would reflect ₹12 lakh as the total amount, ₹9 lakh as paid within time and ₹3 lakh as not paid within time and inadmissible for the year. 

For businesses subject to tax audit, this makes accurate supplier classification, payment terms and bill-wise payment records important throughout the year.

Using BUSY accounting software, businesses can maintain the MSME Type and Udyam Number for parties, review receivables and payables ageing, and access the MSME Audit Information Report. Keeping these details updated during the year can make it easier to review MSE payables before the books are closed instead of reconstructing the information at year-end.

Form MSME-1: Half-Yearly Return for Dues Beyond 45 Days

Specified companies with payments to micro or small enterprise suppliers outstanding for more than 45 days must file Form MSME-1 with the Registrar of Companies. The 45 days are counted from the date of acceptance or deemed acceptance of the goods or services.

The return includes the outstanding payment details, supplier information and reasons for the delay. It is due by 31 October for the April-to-September period and by 30 April for the October-to-March period. Form MSME-1 is a Companies Act return and is separate from Form 3CD tax-audit reporting.

Conclusion

Late payments to micro and small enterprises can affect when a business is allowed to claim a tax deduction. Before closing the books, review each unpaid invoice to determine whether it has exceeded the 15-day deadline or the agreed payment period, which cannot exceed 45 days.

For FY 2025-26, this rule falls under Section 43B(h) of the Income-tax Act, 1961. From 1 April 2026, it continues under Section 37(2)(g) of the Income-tax Act, 2025. Keeping supplier records and payment due dates up to date makes overdue amounts easier to identify.