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. 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.

Which Micro and Small Enterprises Are Covered?

The MSME Ministry revised the classification limits through Notification S.O. 1364(E), dated 21 March 2025, effective from 1 April 2025.

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.

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. 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.

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.

The latest RBI current-rate data checked for this August 2026 update shows the Bank Rate at 5.50%. Three times that rate is 16.50% per year before monthly compounding is taken into account. The Bank Rate can change, so the current RBI rate should be checked when calculating an actual interest liability.

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 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.

Conclusion

The MSME payment rule is primarily about the timing of a tax deduction. For FY 2025-26, businesses should correctly identify eligible micro and small enterprise suppliers, track the applicable 15-day or agreed payment period of up to 45 days, and review overdue balances before closing the year. 

Accurate Udyam details, payment terms and bill-wise records can help businesses identify amounts that may need to be deferred until the year of actual payment.