Section 43B Payment Deductions: Now Section 55
- Section 43B is now Section 55 under the new Act. The "payment basis" rule continues.
- Covered expenses: Taxes, duties, GST, PF, ESI, bonus, leave encashment, interest to banks and NBFCs.
- MSME 45-day rule retained: Payments to MSMEs beyond 45 days are not deductible until paid.
- Year-end planning: Settle PF, GST, and statutory dues before March 31 to claim the deduction in the same year.
Section 43B is one of the most important provisions for businesses. It says that certain expenses are deductible only when you actually pay them - not when you merely account for them. Section 43B is now Section 55 under the Income Tax Act 2025. If you run a business, this directly affects your tax liability and year-end provisioning.
Section 43B to Section 55: What Changed
What is the "Payment Basis" Rule
Normally, businesses follow the mercantile (accrual) system of accounting - expenses are recorded when they are incurred, not when paid. Section 55 creates an exception for specific items. Even if you have booked the expense in your accounts, you cannot claim the deduction unless you have actually made the payment on or before the due date of filing your income tax return.
Items Covered Under Section 55
PF and ESI Contributions
Employer's contribution to Provident Fund, ESI (Employees' State Insurance), superannuation fund, or any other employee welfare fund is deductible only if paid before the due date of filing the return (October 31 for audited businesses). If you provision for PF in March but pay it in November, the deduction is disallowed for that year.
Bonus and Commission to Employees
Bonus or commission payable to employees is deductible only on payment. If you declare a bonus in March but actually pay it in April or May, the deduction is allowed in the year of payment - provided it is paid before the return filing due date.
Interest on Loans from Financial Institutions
Interest payable to banks, financial institutions, or public financial institutions is deductible only when paid. If you have accrued interest on a term loan but have not actually paid it, you cannot claim the deduction.
Taxes, Duties, and Cess
Any tax, duty, cess, or fee payable under any law (GST, property tax, professional tax, etc.) is deductible only on payment. Provisions made for tax liabilities without actual payment do not qualify.
Leave Encashment
Provision for leave encashment payable to employees is deductible only when actually paid to the employee. Year-end provisions for accrued leave are not deductible until payment is made.
43B(h) - MSME Payment Within 45 Days
This is the most impactful recent addition. Under Section 55(h) (old 43B(h)), if you buy goods or services from a micro or small enterprise registered under the MSME Act, you must pay the supplier within the agreed time period, which cannot exceed 45 days.
If you fail to pay within 45 days (or the agreed shorter period):
- The purchase amount is disallowed as a deduction in the year of purchase
- The deduction becomes available only in the year when actual payment is made
- This can significantly increase your taxable income if you have large outstanding MSME payables at year-end
Practical tip: Check the MSME registration status of your suppliers on the Udyam portal and ensure payments are made within 45 days to avoid disallowance.
Year-End Checklist Before March 31
All monthly contributions deposited before the return filing due date.
Pay before the return filing due date. Year-end provision alone is not enough.
Clear all outstanding dues to micro and small enterprises within 45 days of invoice. Check Udyam status of suppliers.
Pay all accrued interest to banks and financial institutions before March 31.
Convert provisions to actual payments where possible.
Pay all pending GST, professional tax, and other statutory dues. Provisions without actual payment do not qualify.
Check the Udyam status of every supplier. If they are micro or small and you pay them beyond 45 days, that entire purchase amount becomes non-deductible in the year of invoice. Deduction shifts to the year of actual payment, often forcing a large taxable income spike.
Frequently Asked Questions
What is the new section number for 43B?
Section 43B is now Section 55 under the Income Tax Act 2025. It continues to require actual payment of PF, ESI, bonus, taxes, interest, leave encashment, and MSME dues before claiming them as deductions.
What is the MSME payment rule under Section 55(h)?
Under Section 55(h) (old 43B(h)), payments to micro and small enterprises must be made within 45 days (or the agreed shorter period). If payment is delayed beyond 45 days, the expense is disallowed as a deduction in that year and can only be claimed in the year of actual payment.
What happens if PF is deposited late?
If the employer's PF contribution is deposited after the due date of filing the income tax return, it is disallowed as a deduction under Section 55. The employee's share of PF (deducted from salary) has an even stricter deadline under Section 48 (old 36(1)(va)). It must be deposited by the PF due date, not the return filing date.
Does Section 55 apply to all businesses?
Yes. Section 55 applies to all businesses and professionals who follow the mercantile (accrual) system of accounting. If you use the cash system, this section is less relevant since you already account for expenses only when paid.
For depreciation under the new act (the other major business deduction), see Section 32 now Sections 34-38. For tax audit triggers and reporting, see tax audit Section 44AB now 57.
Disclaimer: This article provides general information about the Income Tax Act 2025 and is not tax advice. Consult a qualified Chartered Accountant for advice specific to your situation.
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