Section 43B in Income Tax Act: Expenses, Conditions, Exceptions

Section 43B in Income Tax Act: Expenses, Conditions, Exceptions. Section 43B in Income Tax Act, 1961, is an important provision for taxpayers, especially those involved in business or profession. It lays down rules related to specific expenses that are allowed as deductions only when actually paid, irrespective of the accounting method followed. This section ensures that deductions are not claimed on a mere accrual basis but only on payment basis, helping the government track actual cash outflows and prevent tax evasion through deferrals.
What is Section 43B of the Income Tax Act with Example?
Section 43B in Income Tax Act restricts the claim of certain expenditures unless they are actually paid during the financial year or on or before the due date of filing the return of income under Section 139(1). These expenditures include taxes, duties, cess, contributions to employee welfare funds, bonus, commission, leave encashment, and others. The aim is to discourage delayed payments while still allowing genuine business expenses to be deducted once settled.
For example, if ABC Corporation makes a contribution of Rs. 1,00,000 to the Employee Provident Fund (EPF) for FY 2023-24 and pays the amount before the due date of filing ITR (September 30, 2024), they can claim it as a deduction in FY 2023-24. However, if the payment is made after the due date, the deduction will be allowed only in the year of payment, i.e., the next financial year.
This example highlights the importance of timely payments to claim deductions under Section 43B in Income Tax Act.
Expenses Covered Under Section 43B of Income Tax Act
Section 43B specifically lists out expenses that qualify for deduction only upon actual payment. Below is a detailed explanation of each type:
Contributions to Employee Welfare Funds
Payments made by an employer to employee welfare schemes such as Provident Fund (PF), Employees State Insurance (ESI), Labour Welfare Fund, and National Pension System (NPS) are deductible only when actually paid. This provision ensures that employers do not just book the liability but also fulfil it to ensure employees' benefits.
Statutory Dues
Any amount payable as tax, duty, cess, or fees under any law (such as GST, VAT, Excise Duty, etc.) is allowed as a deduction only if it is paid before the due date of filing the income tax return. This clause encourages timely settlement of government dues.
Bonus and Commission to Employees
Bonuses and commissions payable to employees can be claimed as deductions under Section 43B in Income Tax Act if they are actually paid before the due date of return filing. If not paid by the due date, the benefit of deduction is postponed to the year of actual payment.
Leave Encashment
Leave encashment payments made to employees for unused leaves are deductible only on actual payment. Even if the liability is recorded in books, the deduction is disallowed until the amount is paid to the employee.
Interest on Loans from Banks and Financial Institutions
Interest payable on loans taken from Scheduled Banks, Public Financial Institutions, State Financial Corporations, or State Industrial Investment Corporations will be allowed as a deduction only if the interest is paid before the due date of return filing.
Payment to Indian Railways
Any amount payable to Indian Railways for the use of its assets or for freight charges, booking, etc., is allowed as a deduction only when the payment is actually made. This ensures that such public utility charges are not deferred without being settled.
Payment to Micro or Small Enterprises
Introduced via Finance Act 2023, Section 43B now also includes payments to Micro and Small Enterprises. If payment is not made within the time limit specified in Section 15 of the MSMED Act, 2006, then it will not be allowed as a deduction in the same financial year, even if the books reflect the liability.
All these expenses will be considered deductible only when paid either during the relevant financial year or by the due date for filing income tax returns for that year.
Conditions for Claiming Deductions Under Section 43B of Income Tax Act
To avail deductions under Section 43B, the following conditions must be satisfied:

Actual Payment Requirement: The primary requirement is that the expenditure must be paid and not just booked as a liability. Accrual entries without actual disbursement of funds are not sufficient to claim deduction.

Payment Made Before Due Date of Filing ITR: The payment must be made on or before the due date of filing the income tax return as per Section 139(1). Payments made beyond this date are not eligible for deduction in the current year.

Compulsory Nature of Payment: The expenditure must be of a mandatory nature. Optional payments, donations, or non-contractual payments do not qualify under Section 43B.

Supporting Documentation: Payments should be well-supported by proper documentation. Payments made in cash or undocumented settlements may be disallowed. Bank statements, payment challans, or receipts should be maintained.

These conditions aim to ensure that the deductions are availed only for genuine and documented business expenditures.
Exceptions under Section 43B of the Income Tax Act
While Section 43B primarily applies to actual payments, there are some exceptions:

Mercantile Accounting System: For taxpayers following the mercantile system of accounting, they can still claim deductions under Section 43B if they make the payment before the due date for ITR filing. This balances accrual accounting with the need for real-time cash settlement.

Timely Payments Before ITR Due Date: If an expenditure is booked in one year but paid before the ITR filing date, then it is considered paid in the same year and hence deductible.

Documentary Evidence of Payment: If the payment is made through verifiable means like NEFT, RTGS, cheque, or bank transfer and backed by appropriate records, then it qualifies under Section 43B.

These exceptions give businesses the flexibility to claim legitimate deductions while ensuring fiscal discipline.
Disallowances Under Section 43B in Income Tax Act
It is equally important to understand what is disallowed under this section:

Conversion of Interest to Share Capital: If an interest liability is converted into equity or share capital instead of actual cash payment, it is not considered as payment for the purpose of Section 43B. Hence, the deduction cannot be claimed.

Late Payment to MSMEs: As per the 2023 amendment, any delayed payment to Micro, Small and Medium Enterprises (MSMEs) beyond the timeline defined in Section 15 of the MSMED Act, 2006, will be disallowed. Timely clearance of such dues is now mandatory for deduction eligibility.

Non-Statutory Payments: Any payments which are not mandatory under law or contract (e.g., gifts, voluntary bonuses) do not qualify under Section 43B, even if actually paid.

Cash Payments Without Proof: Payments made in cash without a supporting bill or voucher may be rejected by the tax authorities.

Proviso to Section 43B
The proviso to Section 43B states that any sum payable to a micro or small enterprise shall be allowed as a deduction only if the payment is made within the time prescribed in the MSMED Act, 2006. This is an overriding clause added by the Finance Act 2023 to protect the interests of small businesses by ensuring timely payments.
Conclusion
Section 43B in Income Tax Act plays an important role in regulating the claiming of deductions by ensuring actual disbursement of funds for statutory and contractual obligations. Businesses should prioritize the timely payment of their liabilities—especially statutory dues, employee-related payments, and payments to MSMEs—to avoid disallowance under this section. Taxpayers must keep proper records and ensure that all qualifying payments are settled before the due date of return filing to claim deductions. Adhering to these provisions not only helps in lawful tax savings but also promotes financial discipline and responsible business practices.
If you have any questions, then you can book consultation with Compliance Calendar LLP experts through email at info@ccoffice.in or Call/Whatsapp at +91 9988424211
Frequently Asked Questions on Section 43B in Income Tax Act
Q1. Is TDS included in 43B?
Ans. No, TDS is not included under Section 43B because it is not an expense for the deductor. It is a tax deducted on behalf of the government and is not eligible for deduction under this section.
Q2. What is the latest amendment in Section 43B?
Ans. As per the Finance Act 2023, any payment due to Micro and Small Enterprises that is not paid within the time limit specified in Section 15 of the MSMED Act, 2006, is not allowed as a deduction under Section 43B.
Q3. What kind of expenses are disallowed under Section 43B?
Ans. Any expense listed in Section 43B that is not paid by the due date of filing the income tax return is disallowed. This includes statutory dues, employee-related payments, and MSME dues.
Q4. What is the significance of the proviso to Section 43B?
Ans. The proviso emphasizes that any payment to a micro or small enterprise must be made within the MSMED Act’s timeline to be allowed as a deduction. Failure to comply results in disallowance.
Q5. Is NPS covered under Section 43B?
Ans. Yes, contributions to the National Pension System (NPS) for employees are covered under Section 43B and are allowed as a deduction if paid before the due date of filing ITR.

Section 43B in Income Tax Act, 1961, is an important provision for taxpayers, especially those involved in business or profession. It lays down rules related to specific expenses that are allowed as deductions only when actually paid, irrespective of the accounting method followed. This section ensures that deductions are not claimed on a mere accrual basis but only on payment basis, helping the government track actual cash outflows and prevent tax evasion through deferrals.

What is Section 43B of the Income Tax Act with Example?

Section 43B in Income Tax Act restricts the claim of certain expenditures unless they are actually paid during the financial year or on or before the due date of filing the return of income under Section 139(1). These expenditures include taxes, duties, cess, contributions to employee welfare funds, bonus, commission, leave encashment, and others. The aim is to discourage delayed payments while still allowing genuine business expenses to be deducted once settled.

For example, if ABC Corporation makes a contribution of Rs. 1,00,000 to the Employee Provident Fund (EPF) for FY 2023-24 and pays the amount before the due date of filing ITR (September 30, 2024), they can claim it as a deduction in FY 2023-24. However, if the payment is made after the due date, the deduction will be allowed only in the year of payment, i.e., the next financial year.

This example highlights the importance of timely payments to claim deductions under Section 43B in Income Tax Act.

Expenses Covered Under Section 43B of Income Tax Act

Section 43B specifically lists out expenses that qualify for deduction only upon actual payment. Below is a detailed explanation of each type:

Contributions to Employee Welfare Funds

Payments made by an employer to employee welfare schemes such as Provident Fund (PF), Employees State Insurance (ESI), Labour Welfare Fund, and National Pension System (NPS) are deductible only when actually paid. This provision ensures that employers do not just book the liability but also fulfil it to ensure employees' benefits.

Statutory Dues

Any amount payable as tax, duty, cess, or fees under any law (such as GST, VAT, Excise Duty, etc.) is allowed as a deduction only if it is paid before the due date of filing the income tax return. This clause encourages timely settlement of government dues.

Bonus and Commission to Employees

Bonuses and commissions payable to employees can be claimed as deductions under Section 43B in Income Tax Act if they are actually paid before the due date of return filing. If not paid by the due date, the benefit of deduction is postponed to the year of actual payment.

Leave Encashment

Leave encashment payments made to employees for unused leaves are deductible only on actual payment. Even if the liability is recorded in books, the deduction is disallowed until the amount is paid to the employee.

Interest on Loans from Banks and Financial Institutions

Interest payable on loans taken from Scheduled Banks, Public Financial Institutions, State Financial Corporations, or State Industrial Investment Corporations will be allowed as a deduction only if the interest is paid before the due date of return filing.

Payment to Indian Railways

Any amount payable to Indian Railways for the use of its assets or for freight charges, booking, etc., is allowed as a deduction only when the payment is actually made. This ensures that such public utility charges are not deferred without being settled.

Payment to Micro or Small Enterprises

Introduced via Finance Act 2023, Section 43B now also includes payments to Micro and Small Enterprises. If payment is not made within the time limit specified in Section 15 of the MSMED Act, 2006, then it will not be allowed as a deduction in the same financial year, even if the books reflect the liability.

All these expenses will be considered deductible only when paid either during the relevant financial year or by the due date for filing income tax returns for that year.

Conditions for Claiming Deductions Under Section 43B of Income Tax Act

To avail deductions under Section 43B, the following conditions must be satisfied:

Actual Payment Requirement: The primary requirement is that the expenditure must be paid and not just booked as a liability. Accrual entries without actual disbursement of funds are not sufficient to claim deduction.
Payment Made Before Due Date of Filing ITR: The payment must be made on or before the due date of filing the income tax return as per Section 139(1). Payments made beyond this date are not eligible for deduction in the current year.
Compulsory Nature of Payment: The expenditure must be of a mandatory nature. Optional payments, donations, or non-contractual payments do not qualify under Section 43B.
Supporting Documentation: Payments should be well-supported by proper documentation. Payments made in cash or undocumented settlements may be disallowed. Bank statements, payment challans, or receipts should be maintained.

These conditions aim to ensure that the deductions are availed only for genuine and documented business expenditures.

Exceptions under Section 43B of the Income Tax Act

While Section 43B primarily applies to actual payments, there are some exceptions:

Mercantile Accounting System: For taxpayers following the mercantile system of accounting, they can still claim deductions under Section 43B if they make the payment before the due date for ITR filing. This balances accrual accounting with the need for real-time cash settlement.
Timely Payments Before ITR Due Date: If an expenditure is booked in one year but paid before the ITR filing date, then it is considered paid in the same year and hence deductible.
Documentary Evidence of Payment: If the payment is made through verifiable means like NEFT, RTGS, cheque, or bank transfer and backed by appropriate records, then it qualifies under Section 43B.

These exceptions give businesses the flexibility to claim legitimate deductions while ensuring fiscal discipline.

Disallowances Under Section 43B in Income Tax Act

It is equally important to understand what is disallowed under this section:

Conversion of Interest to Share Capital: If an interest liability is converted into equity or share capital instead of actual cash payment, it is not considered as payment for the purpose of Section 43B. Hence, the deduction cannot be claimed.
Late Payment to MSMEs: As per the 2023 amendment, any delayed payment to Micro, Small and Medium Enterprises (MSMEs) beyond the timeline defined in Section 15 of the MSMED Act, 2006, will be disallowed. Timely clearance of such dues is now mandatory for deduction eligibility.
Non-Statutory Payments: Any payments which are not mandatory under law or contract (e.g., gifts, voluntary bonuses) do not qualify under Section 43B, even if actually paid.
Cash Payments Without Proof: Payments made in cash without a supporting bill or voucher may be rejected by the tax authorities.

Proviso to Section 43B

The proviso to Section 43B states that any sum payable to a micro or small enterprise shall be allowed as a deduction only if the payment is made within the time prescribed in the MSMED Act, 2006. This is an overriding clause added by the Finance Act 2023 to protect the interests of small businesses by ensuring timely payments.

Conclusion

Section 43B in Income Tax Act plays an important role in regulating the claiming of deductions by ensuring actual disbursement of funds for statutory and contractual obligations. Businesses should prioritize the timely payment of their liabilities—especially statutory dues, employee-related payments, and payments to MSMEs—to avoid disallowance under this section. Taxpayers must keep proper records and ensure that all qualifying payments are settled before the due date of return filing to claim deductions. Adhering to these provisions not only helps in lawful tax savings but also promotes financial discipline and responsible business practices.

If you have any questions, then you can book consultation with Compliance Calendar LLP experts through email at info@ccoffice.in or Call/Whatsapp at +91 9988424211

Frequently Asked Questions on Section 43B in Income Tax Act

Q1. Is TDS included in 43B?

Ans. No, TDS is not included under Section 43B because it is not an expense for the deductor. It is a tax deducted on behalf of the government and is not eligible for deduction under this section.

Q2. What is the latest amendment in Section 43B?

Ans. As per the Finance Act 2023, any payment due to Micro and Small Enterprises that is not paid within the time limit specified in Section 15 of the MSMED Act, 2006, is not allowed as a deduction under Section 43B.

Q3. What kind of expenses are disallowed under Section 43B?

Ans. Any expense listed in Section 43B that is not paid by the due date of filing the income tax return is disallowed. This includes statutory dues, employee-related payments, and MSME dues.

Q4. What is the significance of the proviso to Section 43B?

Ans. The proviso emphasizes that any payment to a micro or small enterprise must be made within the MSMED Act’s timeline to be allowed as a deduction. Failure to comply results in disallowance.

Q5. Is NPS covered under Section 43B?

Ans. Yes, contributions to the National Pension System (NPS) for employees are covered under Section 43B and are allowed as a deduction if paid before the due date of filing ITR.