Section 43B(h): The MSME 45-Day Payment Rule, With Examples

Under section 43B(h), a buyer who pays a micro or small supplier late can deduct that purchase only in the year it actually pays. Late means after 15 days, or after a written credit period capped at 45 days. FY 2025-26 follows the 1961 Act; from tax year 2026-27 the rule is section 37(2)(g) of the 2025 Act.

What does the rule actually say?

Normally a business that keeps accounts on the accrual basis deducts a purchase in the year it books the bill, even if it pays later. Section 43B lists a few expenses that are allowed only when paid, such as taxes and employer contributions to provident fund. The Finance Act, 2023 added clause (h): any sum payable to a micro or small enterprise beyond the time limit in section 15 of the MSMED Act.

The Income-tax Act, 2025, in force from 1 April 2026, carries the same rule in section 37(2)(g). The government confirmed the mapping in a Rajya Sabha reply on 21 July 2026, and the Income Tax Department's own text of section 37 shows it. So nothing changes for you except the section number you quote.

Why does it exist? Small suppliers often wait 90 or 120 days for money that big buyers owe them. The MSMED Act already allowed interest on late payment, but few suppliers dared to claim it. Tying the buyer's tax deduction to prompt payment makes the buyer's own accountant chase the payment.

How the 15 and 45 days are counted

Interest is compound, with monthly rests, at three times the bank rate notified by the RBI. The bank rate was 5.75% after the October 2026 policy, which makes the late-payment rate 17.25% a year. The MSMED Act also bars the buyer from deducting that interest for income tax.

A worked example for FY 2025-26

Kavya runs a skincare brand and sells on Amazon and her own website. Her accounts follow the accrual basis. In FY 2025-26 she buys from three suppliers:

• Bottle maker, micro, no written agreement. Goods worth Rs 3,00,000 accepted on 10 January 2026. She had to pay within 15 days but pays on 20 May 2026. That Rs 3,00,000 is not deductible in FY 2025-26. It is deductible in tax year 2026-27, the year she pays.
• Label printer, small, written 45-day term. Rs 2,00,000 accepted on 1 March 2026, paid on 10 April 2026. She paid within the time limit, so on the usual reading the expense stays in FY 2025-26.
• Packaging wholesaler, a trader. Rs 1,50,000 paid in 70 days. A trader's MSME status is for bank lending only, so most CAs would not disallow this.

What does the late bottle bill cost her? If her income is taxed at 30%, the Rs 3,00,000 shifted out of the year adds Rs 90,000 to her FY 2025-26 tax, before cess. She gets the deduction a year later, but the cash is gone now. On top, the supplier can claim interest. At 17.25% for 114 days, simple interest alone is about Rs 16,200, and monthly compounding adds a little. That interest is not deductible either.

Who should care

Are you a buyer? If you buy packaging, printing, job work or photography from small local units, you are exposed. Ask each supplier for a Udyam certificate, note the category, and put a payment term of 45 days or less in writing.

Are you a supplier? If you are a micro or small manufacturer or service provider selling to other businesses, this rule helps you. Print your Udyam number on invoices and tell the buyer's accounts team your category. If you are a pure reseller, read Udyam registration for traders first, because the protection generally does not reach you.

Filing under the presumptive scheme? Under section 44AD your profit is a fixed share of turnover, not turnover minus expenses, so this rule usually has little bite for you as a buyer. See section 44AD explained.

The mistake people usually make

They treat the rule like the other items in section 43B. For taxes and provident fund, paying before the return due date saves the deduction for the year. Clause (h) is expressly carved out of that relief in the 1961 Act, and section 37(3) of the 2025 Act does the same. If a micro supplier's bill is overdue on 31 March, paying it in June does not help that year.

The second mistake is checking the supplier's status once and never again. A supplier can move from small to medium, and then the rule stops applying. Ask for a current certificate each year.

Did the 2026 amendment change the 45 days?

Parliament passed the MSMED (Amendment) Bill, 2026 in August 2026. The government's factsheet lists faster mediation and arbitration, TReDS settlement for central public sector buyers, multiple Facilitation Councils and lighter penalties. It does not list a change to the 15 and 45 day limits. Its provisions are reported to be coming into force in stages, so check with a CA before relying on any new procedure.

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