The MSME 45-Day Payment Rule (Section 43B(h)): What Small Buyers and Suppliers Must Get Right
Section 43B(h) disallows your tax deduction for payments to Micro and Small enterprises unless paid within 15 or 45 days. The 45-day cap is absolute. Here is how the rule works and what to fix before year-end.
- Section 43B(h) defers a buyer's deduction on payables to Micro/Small enterprises unless paid within 15 days (no agreement) or 45 days (with agreement).
- The 45-day cap is absolute — a contract allowing 60-day credit does not protect the buyer; the deduction is still deferred.
- It applies only to suppliers holding valid Udyam Registration classified as Micro or Small. Medium enterprises are outside the rule entirely.
- Late payment is a double hit: deferred deduction plus mandatory interest at three times the RBI bank rate, compounded monthly — and that interest is itself non-deductible.
If you buy from a small supplier and pay them late, the tax cost lands on you — not them. Section 43B(h) of the Income-tax Act disallows your deduction for any amount owed to a Micro or Small enterprise unless you pay within the MSMED Act limit: 15 days with no written agreement, or a maximum of 45 days with one (Tally Solutions, 2024). As your FY 2025-26 books close on 31 March 2026, this clause decides which expenses you can actually claim.
What exactly does Section 43B(h) do?
Inserted by the Finance Act, 2023 and effective from AY 2024-25, the clause says a buyer can claim a deduction for amounts payable to a Micro or Small enterprise only in the year the payment is actually made, if it crosses the MSMED Act time limit (IndiaFilings, 2024). Pay on time and you deduct in the same year; pay late and the deduction shifts to the year you finally pay, inflating your taxable income now.
The clock runs from the date of acceptance — or deemed acceptance — of goods or services under Section 15 of the MSMED Act, 2006. With no written agreement the limit is 15 days; with a written agreement the limit is whatever you agreed, capped at 45 days.
My contract allows 60-day credit. Am I safe?
No. The 45-day period is an absolute ceiling. A written agreement can shorten it but cannot extend it (Cashfree, 2024). If you pay after 45 days, the deduction is deferred regardless of what the contract says. Many buyers assume a long credit term in the purchase order protects them — it does not.
Who counts as a covered supplier?
Only Micro and Small enterprises with a valid Udyam Registration. Medium enterprises are excluded, and old Udyog Aadhaar or EM-I/II registrations no longer count (Tally Solutions, 2024). Your own registration status is irrelevant — what matters is the supplier's classification (IndiaFilings, 2024). The cleanest control is to collect each supplier's Udyam Registration Number and verify their current category before treating any payable as covered. A vendor's Udyam status is one more reason to keep your own MSME Udyam registration and records current.
The hidden second penalty: non-deductible interest
Late payment triggers two costs. First, 43B(h) defers your deduction on the principal. Second, Section 16 of the MSMED Act mandates interest at three times the RBI bank rate, compounded monthly, from the day after the deadline until you pay — even if the contract is silent (Udyamita Helpline, 2024). Worse, that interest is permanently non-deductible under Section 23 of the MSMED Act (My Digital Filing, 2024).
Frequently Asked Questions
My contract with an MSME supplier allows 60-day credit. Am I safe from 43B(h)?
No. The 45-day period is an absolute ceiling. A written agreement can shorten it but cannot extend it. If you pay after 45 days, the deduction is deferred to the financial year in which you actually pay, regardless of what your contract says — adding to your taxable income for the current year.
Does Section 43B(h) apply to payments to all my suppliers?
Only to suppliers registered as Micro or Small enterprises on the Udyam portal. Medium enterprises are excluded, and old Udyog Aadhaar or EM-I/II registrations no longer count. Collect each supplier's Udyam Registration Number and verify their classification before treating any payable as covered.
What extra cost do I face if I pay an MSME supplier late?
Two costs. Section 43B(h) defers your deduction on the principal until you actually pay. Separately, Section 16 of the MSMED Act mandates interest at three times the RBI bank rate, compounded monthly, from the day after the deadline — and that interest is permanently non-deductible under Section 23.
Does this rule still apply under the new Income-tax Act, 2025?
Yes. The provision carries forward under the new Act, effective 1 April 2026, with equivalent clause numbering (ClearTax Advisors, 2026). For your FY 2025-26 books closing 31 March 2026, clear all Micro and Small enterprise payables within the 15/45-day limits to preserve your deductions.
What should you do next?
Before 31 March 2026, run a payables ageing report, flag every Micro/Small supplier by Udyam status, and clear anything past 45 days. For year-end books and tax, see Bizeract bookkeeping services and business ITR filing. For the wider month's updates, read our June 2026 Indian SMB news roundup.
What to verify before acting on The MSME 45-Day Payment Rule)
Rules and platform behaviour change after an article is published. Confirm thresholds, registration status, return forms, document rules, and portal notices against the GST Portal before you act on anything below, because the right answer depends on your entity, state, turnover, and current setup.
Going deeper: MSME / Udyam Registration, Bookkeeping Services, and Business ITR Filing.
Frequently asked questions
My contract with an MSME supplier allows 60-day credit. Am I safe from Section 43B(h)?
No. The 45-day period is an absolute ceiling. A written agreement can shorten it but cannot extend it. If you pay after 45 days, the deduction is deferred to the financial year in which you actually pay, regardless of what your contract says, adding to your taxable income for the current year.
Does Section 43B(h) apply to payments to all my suppliers?
Only to suppliers registered as Micro or Small enterprises on the Udyam portal. Medium enterprises are excluded, and old Udyog Aadhaar or EM-I/II registrations no longer count. Collect each supplier’s Udyam Registration Number and verify their classification before treating any payable as covered.
What extra cost do I face if I pay an MSME supplier late?
Two costs. Section 43B(h) defers your deduction on the principal until you actually pay. Separately, Section 16 of the MSMED Act mandates interest at three times the RBI bank rate, compounded monthly, from the day after the deadline — and that interest is permanently non-deductible under Section 23.
Does this rule still apply under the new Income-tax Act, 2025?
Yes. The provision carries forward under the new Act, effective 1 April 2026, with equivalent clause numbering. For your FY 2025-26 books closing 31 March 2026, clear all Micro and Small enterprise payables within the 15/45-day limits to preserve your deductions.
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