If you buy from a micro or small business and pay late, you can lose the income-tax deduction for that purchase and owe the supplier heavy interest. The rule people know as "Section 43B(h)" did not go away on 1 April 2026: it moved into the new Income-tax Act, 2025 as Section 37(2)(g).
Key takeaway: Pay micro and small suppliers within 15 days of accepting goods or services, or within the agreed period up to a maximum of 45 days if you have a written agreement. Anything still unpaid past that limit is deducted only in the tax year you actually pay it.
Proof matrix: the law behind the rule
| Provision | What it says |
|---|---|
| Income-tax Act, 2025 — Sec 37(2)(g) | Amount payable to a micro or small enterprise beyond the time limit in Sec 15 of the MSMED Act is allowed as a deduction only when actually paid. (Earlier: Sec 43B(h), Income-tax Act 1961, from FY 2023-24.) |
| Sec 37(3) | The usual relief of "pay before the return due date" does not apply to clause (g). |
| MSMED Act, 2006 — Sec 15 | Pay by the agreed date, which cannot exceed 45 days from acceptance. No written agreement: 15 days. |
| MSMED Act — Sec 16 | Late payment attracts compound interest with monthly rests at 3× the RBI Bank Rate. |
| MSMED Act — Sec 23 | That interest is not deductible for income tax. |
| Commencement | Income-tax Act, 2025 in force from 1 April 2026 (tax year 2026-27 onwards). |
Who is covered?
- Buyer: any business or professional claiming the purchase as an expense — whether or not the buyer is itself an MSME.
- Supplier: a micro or small enterprise registered on Udyam. Medium enterprises are not covered.
- Traders: retail and wholesale traders get Udyam registration only for priority-sector lending (MSME Ministry memo, 2 July 2021), so the delayed-payment protection generally does not apply to purchases from them. Check the supplier's Udyam certificate for the activity type.
- Capital goods bought on credit are not an expense, so the deduction rule mainly hits stock, raw material and services.
A worked example
You run a garment shop. On 1 February 2027 you accept ₹5,00,000 of fabric from a micro manufacturer under a written 45-day credit agreement. The limit ends on 18 March 2027.
| Scenario | Deduction in tax year 2026-27 | Interest owed to supplier |
|---|---|---|
| Paid on 15 March 2027 | ₹5,00,000 allowed | Nil |
| Still unpaid on 31 March 2027, paid 15 May 2027 | ₹0 — ₹5,00,000 shifts to tax year 2027-28 | About ₹14,500 (about 2 months at 17.25%, compounded monthly) |
At a 30% tax rate, the late case pushes roughly ₹1.5 lakh of extra tax into 2026-27, plus about ₹14,500 of interest that you cannot deduct. Paying on time is far cheaper than a short-term loan.
Before you file: common mistakes
- Assuming "I will pay before filing my return" saves the deduction. For MSME dues, it does not.
- Writing 60 or 90 days in the purchase order. The law caps it at 45; anything longer is treated as 45.
- Not asking suppliers for their Udyam number. Without it you cannot tell who is covered.
- Paying part and forgetting the rest. Only the unpaid portion past the limit is disallowed, but it still counts.
- Companies forgetting MSME Form I: the half-yearly MCA return for April–September is due by 31 October.
Playbook for business owners
- Collect Udyam numbers from all suppliers and mark who is micro or small (and not a trader).
- Put the credit period in writing — 45 days maximum.
- Every week, list purchase bills older than 30 days from MSME suppliers and pay them first.
- Before 31 March, clear every MSME bill whose limit has passed.
- Share the list of MSME dues with your CA for the tax audit report and Form I.
Track supplier dues in DAM
Steps use DAM's in-app search entries and the Reports dashboard.
- Open Search and type New Purchase to record each supplier bill on the date you accept the goods.
- Search Reports and open All Parties to see every party's current dues, receivable and payable.
- Search Purchase Invoices to browse the purchase register by date and spot old unpaid bills.
- When you pay, search Pay Money, pick the supplier and record the amount so the balance updates.
See every supplier you owe, in one list
Track purchase bills and payments so no MSME due slips past 45 days.
Frequently Asked Questions
Is Section 43B(h) still applicable in 2026?
The same rule continues as Section 37(2)(g) of the Income-tax Act, 2025, from tax year 2026-27. For FY 2025-26 and earlier, Section 43B(h) of the 1961 Act applies.
What if there is no written agreement?
You must pay within 15 days of accepting the goods or services.
Does the rule apply to medium enterprises?
No. Only micro and small enterprises are covered.
What interest rate applies on late payment?
Three times the RBI Bank Rate, compounded monthly. With the Bank Rate at 5.75% (October 2026), that is 17.25% a year.
Can a supplier complain?
Yes, on the MSME Samadhaan portal, which routes cases to the state Micro and Small Enterprises Facilitation Council.
Sources
Content checked on 23 October 2026. Income-tax Act, 2025, Section 37(2)(g) · Income Tax Department: Act in force from 1 April 2026 · MSMED Act, 2006 (DC-MSME) · MSME Samadhaan.
Disclaimer: This guide is for educational purposes only and does not constitute formal tax, legal or financial advice. Verify with a registered Chartered Accountant (CA) before acting.