Section 43B(h) for AY 2026-27: MSME Payment Deadlines, Tax Disallowance and ITR Reporting

AY 2026-27 relates to income earned from 1 April 2025 to 31 March 2026. If your business or profession purchased goods or services from a qualifying micro or small enterprise in FY 2025-26, check the payment deadline for each amount.

The MSMED Act’s 15-day and 45-day payment limits have not been extended. An extension of an income-tax return or audit-report deadline does not extend the time allowed to pay a micro or small supplier under the MSMED Act.

What does Section 43B(h) do?

Section 43B(h) of the Income-tax Act, 1961 covers amounts payable to a micro or small enterprise beyond the time limit specified in Section 15 of the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act).

If the payment deadline is missed, the business deduction is generally allowed in the year the amount is actually paid. Unlike several other categories under Section 43B, this clause does not allow the usual relief for payment made by the due date of the income-tax return.

The provision has applied from AY 2024-25. For AY 2026-27, it concerns qualifying amounts from FY 2025-26.

Who needs to check the rule?

Businesses and professionals claiming expenses when calculating taxable income should review amounts payable to micro and small suppliers. The buyer’s turnover or size does not determine whether Section 43B(h) applies. The key questions are whether the supplier qualifies as a micro or small enterprise and whether payment was made within the MSMED Act deadline.

Check each supplier’s status and records. Do not rely only on a vendor’s description as an “MSME” or on a certificate that may relate to a different period. Keep the Udyam details and verify the supplier’s classification for the relevant period. Section 43B(h) does not cover medium enterprises.

The MSME classification thresholds from 1 April 2025 are:

Classification depends on both investment and turnover. Verify the supplier’s applicable category and registration details, not just turnover.

What is the payment deadline under the MSMED Act?

Section 15 sets the payment deadline by reference to the date goods or services are accepted or deemed accepted. A buyer’s written objection made within the statutory period can affect how the acceptance date is determined. Keep the objection and its resolution on record.

A written agreement can set a payment period, but it cannot exceed 45 days from acceptance or deemed acceptance. If there is no written agreement, payment is due within 15 days.

The invoice date may not be the payment deadline. Keep records of when goods or services were accepted, any written objection, when it was resolved and the agreed payment terms.

How Section 43B(h) affects the deduction

If a qualifying expense was incurred in FY 2025-26 and remained unpaid after the Section 15 deadline, the unpaid amount may have to be added back when calculating taxable business or professional income for AY 2026-27.

The deduction is generally allowed in the year the amount is actually paid, subject to the law and reporting requirements for that year. Paying after the AY 2026-27 return-filing deadline does not preserve the deduction for FY 2025-26.

This differs from some other Section 43B items, where payment by the return-filing due date may allow a deduction in the year the liability was incurred. That relief is not available for Section 43B(h). An extension of the tax-audit or ITR deadline also does not change the supplier-payment deadline under the MSMED Act.

Example: A business records a ₹4 lakh purchase from a qualifying small enterprise in FY 2025-26. The MSMED Act payment deadline passes, and ₹1 lakh remains unpaid on 31 March 2026. The business may have to add back that unpaid ₹1 lakh when calculating taxable income for AY 2026-27. If it pays the amount in a later year, it can generally claim the deduction in the year of payment.

If payment is made after the MSMED Act deadline but before 31 March 2026, it is still paid in FY 2025-26. The late payment may have consequences under the MSMED Act, but Section 43B(h) generally does not defer the deduction to a later financial year solely because it was paid late.

What records should you reconcile?

Create a supplier-wise schedule before closing the books and filing the return. Include:

• Supplier name, PAN and Udyam Registration details.
• The supplier’s applicable micro or small classification.
• Invoice number, amount and supply date.
• Date goods or services were accepted or deemed accepted.
• Written payment terms and any timely objection to the supply.
• Payment deadline for each invoice.
• Amount paid, payment date and outstanding balance.
• Amount disallowed in an earlier year and paid during FY 2025-26.

Compare this schedule with purchase ledgers, accounts payable, bank records and the general ledger. Check invoices individually: one supplier may have multiple invoices with different acceptance dates and payment deadlines.

Do not automatically exclude an amount because it is described as an advance, disputed balance, GST component or capital purchase. Review the contract, accounting treatment and tax rules that apply to the transaction. If classification or timing is unclear, record the basis for your treatment and seek advice based on the facts.

Reporting in the ITR and tax audit

The notified business-return forms and validation rules for AY 2026-27 include information on Section 43B(h) disallowances. The adjustment is reported in the relevant business-income schedules, such as Part A-OI or Schedule BP, depending on the ITR form. Follow the current form and utility for your entity; do not copy a field number from a previous assessment year.

If a tax audit applies, Form 3CD also requires relevant MSME payment information. Reconcile amounts payable, amounts paid within the permitted period and amounts unpaid beyond that period. A tax audit is not what determines whether Section 43B(h) applies; review the transactions even if an audit is not required.

TaxClear’s Tax Audit 2026 guide discusses Form 3CD Clause 22 and related reporting. For return preparation, see the online ITR filing guide for AY 2026-27.

Common mistakes to avoid

• Treating all MSMEs as covered, including medium enterprises.
• Assuming a 60- or 90-day contract term overrides the 45-day statutory maximum.
• Counting from the invoice date without checking acceptance or a valid written objection.
• Treating an ITR or audit-report extension as an extension of the MSMED Act payment deadline.
• Reviewing only the year-end creditor balance without checking each payment deadline.
• Forgetting to claim a deduction in a later year after paying an amount disallowed earlier.
• Relying on tax-audit reporting instead of reconciling purchase and payment records.

Frequently asked questions

Does Section 43B(h) apply to payments to medium enterprises?

No. It covers amounts payable to qualifying micro and small enterprises, not medium enterprises.

Is there a minimum invoice amount or buyer-turnover threshold?

Section 43B(h) does not set a minimum invoice value or buyer-turnover threshold. Check the supplier’s status and the payment deadline.

Can a written contract allow payment after 45 days?

No. Section 15 limits the agreed payment period to 45 days from acceptance or deemed acceptance.

If I pay after the MSMED deadline but before filing my ITR, can I claim the expense for FY 2025-26?

The usual Section 43B payment relief for the return-filing due date does not apply to clause (h). The deduction generally depends on the year of actual payment.

Can I claim an amount that was disallowed last year but paid this year?

Generally, an amount disallowed under Section 43B(h) becomes deductible in the year it is actually paid, subject to the applicable rules and return reporting for that year.