Expenses Allowed on Actual Payment Basis [Section 43B]
## Section 43B — Deduction on Actual Payment Basis
Sec. 43B overrides the mercantile system for certain expenses: even if accrued, these are only deductible when actually paid (within a specified window).
### Covered Expenses
The following expenses are deductible only if paid by the due date of ROI:
1. Any Tax, Duty, Cess (including interest on tax)
2. Employer's contribution towards:
Statutory Provident Fund (SPF)
Recognised Provident Fund (RPF)
Approved Superannuation Fund
Approved Gratuity Fund
Pension scheme u/s 80CCD
Any other fund as per law
3. Bonus or commission to employees (payable other than as profit/dividend)
4. Interest on loan taken from:
Scheduled Bank
Co-operative Bank
Public Financial Institution
State Financial Corporation
State Industrial Investment Corporation
NBFC
5. Leave encashment (leave salary) to employees
6. Amount payable to railways for use of railway assets
### Allowability Logic
```
Expense accrued in P.Y.
/ \
Paid upto due Paid AFTER due
date of ROI date of ROI
| |
Deduction in Deduction in
current P.Y. Year of Payment
(year of expense)
```
### Special — Amount Payable to Micro / Small Enterprise [Sec. 43B(h)]
Amounts payable to Micro or Small enterprises (NOT Medium) beyond the MSMED Act's time limit are deductible only in the year of actual payment — Sec. 43B's 'pay by ROI due date' relief does NOT apply.
MSMED Act time limits:
If there is a written agreement: payment within agreed date (maximum 45 days).
If there is no written agreement: within 15 days.
If paid within the MSMED time limit → deduction in year of accrual.
If paid beyond MSMED time limit → deduction only in year of actual payment (even if paid before ROI due date).
### Special — Conversion of Interest into Loan
If interest payable is converted into a loan / borrowing / debenture, such conversion is not treated as payment for Sec. 43B. Deduction is allowed only when actual installments of the converted loan are paid.
Worked example
### Example 1
Example 1 (Tax/Cess): ABC Ltd. has GST payable of ₹5,00,000 as on 31.3.2026.
If paid by 30.10.2026 (ROI due date) → Allowed in P.Y. 25-26.
If paid on 15.12.2026 → Allowed in P.Y. 26-27.
Example 2 (MSMED — within time): ABC Ltd. purchased goods of ₹10,000 from A & Co. (Micro Enterprise) on 1.3.2026. Written agreement: payment by 5.4.2026.
(i) Paid on 2.4.2026 → Within MSMED limit → Deduction in P.Y. 25-26.
(ii) Paid on 20.4.2026 → Beyond MSMED limit → Deduction in P.Y. 26-27 (year of payment), even though paid before ROI due date.
Example 3 (Bank Interest): XYZ Ltd. accrued ₹2,00,000 bank interest in P.Y. 25-26 but did not pay. Paid in November 2026 (after ROI due date 31.10.2026).
→ Deduction in P.Y. 26-27.
Example 4 (Conversion): ₹1,00,000 interest on bank loan converted into a fresh term loan on 1.4.2026.
→ Conversion ≠ Payment. No deduction in year of conversion. Deduction allowed only as installments of converted loan are repaid.
⚠️ Common exam mistakes
Confusing Sec. 43B with Sec. 36(1)(va) — employer's contribution gets 43B relief (pay by ROI due date), but employee's contribution to PF/ESI does NOT (must be paid by fund's own due date).
Forgetting the MSMED special rule — paying a small enterprise late means deduction shifts to year of payment, regardless of ROI due date.
Treating loan conversion as payment — explicitly disallowed; deduction comes only as the new loan is repaid.
Forgetting that Sec. 43B applies to indirect taxes too — GST/customs/excise interest is allowed only if paid by ROI due date.
Missing that the MSMED relief is restricted to Micro and Small enterprises — Medium enterprises are NOT covered by Sec. 43B(h).
Bare-Act text Section 43B · Income-tax Act, 1961 · click to expand
Section 43B: 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; (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; (c) any sum referred to in clause (ii) of sub-section (1) of section 36 [bonus/commission]; (d) any sum payable by the assessee as interest on any loan or borrowing from any public financial institution / scheduled bank / NBFC etc.; (e) leave encashment; (f) any sum payable to the Indian Railways; (h) any sum payable by the assessee to a micro or small enterprise beyond the time limit specified in section 15 of the MSMED Act, 2006 — shall be allowed... only in computing the income of that previous year in which such sum is actually paid by him. Proviso: Nothing contained in this section [except clause (h)] shall apply where such sum is actually paid by the assessee on or before the due date for furnishing the return of income u/s 139(1).