Section 43B is a powerful override rule that says: no matter what accounting method you use, certain specific expenses are deductible only in the year you actually pay them — not when they accrue. This is a big deal because most businesses use mercantile (accrual) accounting, which normally lets you claim a deduction when the liability arises, even if cash hasn't gone out. 43B punches through that logic for 7 specific categories.
Think of it this way: Rajesh & Co. Pvt. Ltd. owes ₹8 lakh in GST for FY 2024-25 but pays it in November 2025. Even though the liability arose in FY 2024-25, the deduction is allowed only in FY 2025-26 — the year it was actually paid. The law does this to stop businesses from booking expenses on paper to reduce tax while sitting on the cash.
The 7 items covered under Section 43B:
1. Tax, duty, cess, or fee — GST, customs duty, professional tax, etc.
2. Employer's contribution to PF, superannuation fund, gratuity fund, or any employee welfare fund
3. Bonus or commission payable to employees [covered under Section 36(1)(ii)]
4. Interest on loans from Public Financial Institutions (e.g., IFCI), State Financial Corporations, or State Industrial Investment Corporations
5. Interest on loans from Scheduled Banks or eligible Co-operative Banks
6. Leave encashment — salary paid in lieu of earned leave
7. Charges for use of Indian Railways assets
The Golden Escape Clause (Proviso): If you pay any of these items on or before the due date for filing your ITR under Section 139(1) — typically 31st October for companies — the deduction is allowed in the same year the liability arose. So if Rajesh & Co. pays that ₹8 lakh GST by 31st October 2025, the deduction is valid for FY 2024-25 itself. Pay even one day late? Deduction moves to FY 2025-26.
Critical trap — converting interest into a loan: If a bank restructures your account and converts unpaid interest into a fresh loan, that does not count as actual payment. Per Explanation 3C and 3D, deduction is allowed only when real cash is paid. This is asked frequently as a 4-to-8-mark problem in PGBP computation questions.
📊 Worked example
Example 1: GST and PF — What gets deducted when?
Sharma Industries Pvt. Ltd. has the following items for FY 2024-25. ITR due date: 31st October 2025.
| Item | Amount | Date Paid |
|---|---|---|
| GST payable | ₹8,50,000 | 20th September 2025 |
| Employer's PF contribution | ₹4,20,000 | 15th November 2025 |
| Leave encashment to employees | ₹1,80,000 | 28th October 2025 |
Working:
- GST ₹8,50,000 → Paid 20th Sept 2025 → Before ITR due date (31st Oct 2025) → Deductible in FY 2024-25 ✓
- PF ₹4,20,000 → Paid 15th Nov 2025 → After ITR due date → Not deductible in FY 2024-25; shifts to FY 2025-26 ✗
- Leave encashment ₹1,80,000 → Paid 28th Oct 2025 → Before due date → Deductible in FY 2024-25 ✓
Answer: Deduction allowed in FY 2024-25 = ₹8,50,000 + ₹1,80,000 = ₹10,30,000. PF of ₹4,20,000 is deductible only in FY 2025-26.
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Example 2: Interest converted to loan — the nasty trap
Ms. Iyer's company had outstanding interest of ₹3,00,000 on a loan from State Bank of India as on 31st March 2025 (FY 2024-25). The bank agreed to convert this unpaid interest into a fresh term loan on 31st March 2025. She claims ₹3,00,000 as a deduction for FY 2024-25.
Working:
As per Explanation 3D to Section 43B, interest that is converted into a loan or advance shall not be treated as actually paid.
Actual cash outflow on interest = ₹0
Answer: No deduction of ₹3,00,000 is allowed in FY 2024-25. The deduction will be available only in the year Ms. Iyer actually pays the ₹3,00,000 in cash to the bank.
⚠️ Common exam mistakes
- Students claim PF deductions based on accrual. Wrong — employer's PF contribution is a 43B item. If not paid by the ITR due date, the deduction is disallowed for that year entirely. Always check the payment date.
- Confusing the proviso deadline. Many students write '31st March' as the cutoff. The correct deadline is the ITR due date under Section 139(1) — 31st October for companies, 31st July for others. Payments made between 1st April and the ITR due date still qualify for the prior year's deduction.
- Treating interest-to-loan conversion as payment. A very common exam trap. If a bank converts unpaid interest into a new loan, students often tick it as 'paid.' It is NOT. Deduction requires actual cash payment.
- Forgetting that bonus/commission is also covered. Students know about PF and GST but miss that employee bonus and commission (Section 36(1)(ii)) is a 43B item too — deductible only on actual payment.
- Applying 43B to all expenses. Section 43B applies only to its 7 listed categories. For general business expenses like rent or repairs, normal accrual rules under Section 37 apply. Don't extend 43B beyond its specified list.
📖 Bare Act text — Section 43B, Income Tax Act 1961
(click to expand)
Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of— (a) any sum payable by the assessee by way of tax, duty, cess or fee, by whatever name called, under any law for the time being in force, or (b) any sum payable by the assessee as an employer by way of contribution to any provident fund or superannuation fund or gratuity fund or any other fund for the welfare of employees, or (c) any sum referred to in clause (ii) of sub-section (1) of section 36, or (d) any sum payable by the assessee as interest on any loan or borrowing from any public financial institution or a State financial corporation or a State industrial investment corporation, in accordance with the terms and conditions of the agreement governing such loan or borrowing; or (e) any sum payable by the assessee as interest on any loan or advances from a scheduled bank or a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank in accordance with the terms and conditions of the agreement governing such loan or advances, or (f) any sum payable by the assessee as an employer in lieu of any leave at the credit of his employee, or (g) any sum payable by the assessee to the Indian Railways for the use of railway assets, shall be allowed (irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him) only in computing the income referred to in section 28 of that previous year in which such sum is actually paid by him: Provided that nothing contained in this section shall apply in relation to any sum which is actually paid by the assessee on or before the due date applicable in his case for furnishing the return of income under sub-section (1) of section 139 in respect of the previous year in which the liability to pay such sum was incurred as aforesaid and the evidence of such payment is furnished by the assessee along with such return. Explanation 1.—For the removal of doubts, it is hereby declared that where a deduction in respect of any sum referred to in clause (a) or clause (b) of this section is allowed in computing the income referred to in section 28 of the previous year (being a previous year relevant to the assessment year commencing on the 1st day of April, 1983, or any earlier assessment year) in which the liability to pay such sum was incurred by the assessee, the assessee shall not be entitled to any deduction under this section in respect of such sum in computing the income of the previous year in which the sum is actually paid by him. Explanation 2.—For the purposes of clause (a), as in force at all material times, "any sum payable" means a sum for which the assessee incurred liability in the previous year even though such sum might not have been payable within that year under the relevant law. Explanation 3.—For the removal of doubts it is hereby declared that where a deduction in respect of any sum referred to in clause (c) or clause (d) of this section is allowed in computing the income referred to in section 28 of the previous year (being a previous year relevant to the assessment year commencing on the 1st day of April, 1988, or any earlier assessment year) in which the liability to pay such sum was incurred by the assessee, the assessee shall not be entitled to any deduction under this section in respect of such sum in computing the income of the previous year in which the sum is actually paid by him. Explanation 3A.—For the removal of doubts, it is hereby declared that where a deduction in respect of any sum referred to in clause (e) of this section is allowed in computing the income referred to in section 28 of the previous year (being a previous year relevant to the assessment year commencing on the 1st day of April, 1996, or any earlier assessment year) in which the liability to pay such sum was incurred by the assessee, the assessee shall not be entitled to any deduction under this section in respect of such sum in computing the income of the previous year in which the sum is actually paid by him. Explanation 3B.—For the removal of doubts, it is hereby declared that where a deduction in respect of any sum referred to in clause (f) of this section is allowed in computing the income, referred to in section 28, of the previous year (being a previous year relevant to the assessment year commencing on the 1st day of April, 2001, or any earlier assessment year) in which the liability to pay such sum was incurred by the assessee, the assessee shall not be entitled to any deduction under this section in respect of such sum in computing the income of the previous year in which the sum is actually paid by him. Explanation 3C.—For the removal of doubts, it is hereby declared that a deduction of any sum, being interest payable under clause (d) of this section, shall be allowed if such interest has been actually paid and any interest referred to in that clause which has been converted into a loan or borrowing shall not be deemed to have been actually paid. Explanation 3D.—For the removal of doubts, it is hereby declared that a deduction of any sum, being interest payable under clause (e) of this section, shall be allowed if such interest has been actually paid and any interest referred to in that clause which has been converted into a loan or advance shall not be deemed to have been actually paid. Explanation 4.—For the purposes of this section,— (a) "public financial institutions" shall have the meaning assigned to it in section 4A of the Companies Act, 1956 (1 of 1956); (aa) "scheduled bank" shall have the meaning assigned to it in the Explanation to clause (iii) of sub-section (5) of section 11; (b) "State financial corporation" means a financial corporation established under section 3 or section 3A or an institution notified under section 46 of the State Financial Corporations Act, 1951 (63 of 1951); (c) "State industrial investment corporation" means a Government company within the meaning of section 617 of the Companies Act, 1956 (1 of 1956), engaged in the business of providing long-term finance for industrial projects and eligible for deduction under clause (viii) of sub-section (1) of section 36; (d) "co-operative bank", "primary agricultural credit society" and "primary co-operative agricultural and rural development bank" shall have the meanings respectively assigned to them in the Explanation to sub-section (4) of section 80P.
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