MSME Payment Rule Under Section 43B(h): The 45-Day Rule, Disallowance & FY 2025-26 Due Dates Explained

The MSME payment rule under Section 43B(h) is one of the most misunderstood provisions of recent years—and one of the most expensive to get wrong. Introduced by the Finance Act 2023, it directly links your income-tax deduction to whether you paid your small suppliers on time. Get it right and you protect both your cash flow relationships and your deduction. Get it wrong and a large expense can be pushed to a later year, inflating this year’s tax bill.

In this guide, the chartered accountants at KKS Capital Advisor explain exactly how the rule works, who it applies to, how the 15-day and 45-day limits are calculated, how the MSME payment disallowance in income tax is computed, and the practical steps you should take before the MSME due date for FY 2025-26.

What this guide covers

• What Section 43B(h) actually says
• The 15-day and 45-day payment rules explained
• Who is covered – and who is not (traders, medium enterprises)
• Revised MSME classification limits (from 1 April 2025)
• How the disallowance works, with worked examples
• Interest under the MSMED Act
• MSME due date and year-end action plan for FY 2025-26
• How KKS Capital Advisor keeps you compliant
• Frequently asked questions

Why was Section 43B(h) introduced?

Delayed payments have long been the biggest threat to India’s micro and small enterprises. A small supplier often has little bargaining power against a larger buyer, and money stuck in receivables can choke its working capital and even push it out of business. The MSMED Act, 2006 already gave micro and small suppliers a legal right to be paid within 15 or 45 days – but enforcement was weak. Section 43B(h) added financial teeth by tying the buyer’s income-tax deduction to timely payment. In effect, the government converted a compliance nicety into a bottom-line consequence: pay your small suppliers on time, or lose the deduction this year. Understanding this intent helps you see why the rule is strict and why there is no ‘pay by return-filing date’ escape for MSME dues.

What does Section 43B(h) say?

Section 43B of the Income Tax Act lists certain expenses that are allowed as a deduction only when they are actually paid, not merely when they accrue. Clause (h), inserted by the Finance Act 2023 and effective from Assessment Year 2024-25 (FY 2023-24), adds sums payable to micro and small enterprises to that list.

The key change is that the usual ‘pay by the income-tax return due date’ relaxation available for most Section 43B items does not apply to clause (h). For MSME dues, the only way to keep the deduction in the same year is to pay within the MSMED Act timeline.

The 15-day and 45-day payment rules explained

Section 15 of the MSMED Act sets the maximum time a buyer can take to pay a micro or small supplier:

So 45 days is a ceiling, not a default. If there is no written agreement, the limit is 15 days. If there is a written agreement, you can agree on any period up to 45 days – you cannot contract for a longer period to escape the rule.

Who is covered – and who is not

Covered

• Suppliers registered under Udyam as micro or small enterprises
• Micro and small enterprises engaged in manufacturing or providing services

NOT covered

• Medium enterprises: Section 43B(h) applies only to micro and small enterprises. Dues to medium enterprises are outside its scope.
• Wholesale and retail traders: As per Office Memorandum dated 1 September 2021, MSME benefits for traders are restricted to Priority Sector Lending only. The delayed-payment protection of the MSMED Act – and therefore the 43B(h) disallowance – does not apply to purchases from traders.
• Unregistered suppliers: If a supplier is not registered under Udyam as micro/small on the date of the transaction, the disallowance is generally not triggered – though you should keep evidence of their status.

Revised MSME classification limits (from 1 April 2025)

To know whether a supplier is micro or small, you need the current classification limits. These were enhanced with effect from 1 April 2025. An enterprise must satisfy both the investment and turnover ceilings for its category (a composite criterion).

Since Section 43B(h) applies only to micro and small enterprises, the practical takeaway is: payables to suppliers within the micro (≤₹10 crore turnover) and small (≤₹100 crore turnover) categories are the ones you must monitor.

How the MSME payment disallowance in income tax works

The mechanism is straightforward once you see it applied. If a payable to a micro/small supplier is beyond the 15/45-day limit and remains unpaid on 31 March, it is disallowed for that year and added back to your taxable income. You get the deduction only in the year you actually pay.

Example 1 – Paid within the limit (deduction allowed)

You buy raw material worth ₹8,00,000 from a small enterprise on 1 March 2026 with a written agreement of 45 days. You pay by 15 April 2026 (within 45 days). Even though payment is in the next financial year, it is within the MSMED limit, so the ₹8,00,000 is fully deductible in FY 2025-26. No disallowance.

Example 2 – Beyond the limit and unpaid at year-end (disallowed)

You buy raw material worth ₹50,00,000 from a small enterprise in February 2026, with no written agreement (so the limit is 15 days). It is still unpaid on 31 March 2026. Because it crossed 15 days and is unpaid at year-end, the full ₹50,00,000 is added back to your FY 2025-26 income. You will be able to deduct it only in the year you actually pay – say FY 2026-27.

Example 3 – Beyond the limit but paid before year-end (allowed)

You buy services worth ₹3,00,000 from a micro enterprise in December 2025 with a 15-day limit, and although you are late, you clear the payment on 20 March 2026. Since it is actually paid within the same financial year, there is no add-back – the deduction stands in FY 2025-26. (You may, however, still owe MSMED interest for the delay – see below.)

Interest under the MSMED Act

Missing the deadline has a second cost beyond the tax add-back. Under the MSMED Act, delayed payment to a micro or small supplier attracts compound interest, with monthly rests, at three times the RBI-notified bank rate. Importantly, this interest is not allowed as a deduction under income tax. So a late payment can hit you three ways: disallowed expense, non-deductible interest, and a strained supplier relationship.

MSME due date and year-end action plan for FY 2025-26

There is no single ‘MSME due date’ form to file for Section 43B(h); the real deadline is 31 March 2026 – the point at which unpaid, overdue MSME dues get disallowed. The practical work therefore happens before year-end. Here is the checklist our team runs for clients:

1. Identify every vendor registered as micro or small under Udyam (collect their Udyam number and category).
2. Tag payables to those vendors separately in your books.
3. Check each invoice against its 15-day or 45-day limit based on whether a written agreement exists.
4. Clear all overdue micro/small payables before 31 March 2026 to preserve the current-year deduction.
5. Where payment cannot be made, compute the add-back and disclose it correctly in the tax computation and tax audit report.
6. Compute any MSMED interest payable and remember it is not tax-deductible.
7. Update purchase agreements to include clear payment terms within 45 days.

How KKS Capital Advisor keeps you Section 43B(h) compliant

KKS Capital Advisor helps businesses build a Section 43B(h) system rather than firefight at year-end. We set up vendor-master fields for Udyam status, create an ageing report for micro/small payables, review your purchase agreements for correct payment terms, and reconcile overdue dues before 31 March so you keep your deductions. At audit time, we compute and disclose disallowances and MSMED interest accurately in Form 3CD and your financials. If you have already crossed a deadline, we help you quantify and correctly report the impact.

Key takeaways

• Section 43B(h) allows a deduction for micro/small supplier dues only when paid within 15 days (no agreement) or up to 45 days (written agreement).
• If overdue dues are unpaid on 31 March, the expense is disallowed and deductible only in the year of actual payment.
• The rule covers micro and small manufacturers and service providers – not medium enterprises and not wholesale/retail traders.
• Revised classification (from 1 April 2025): Micro ≤₹10 cr turnover, Small ≤₹100 cr turnover.
• Delayed payment also triggers non-deductible MSMED interest at three times the RBI bank rate.
• The real deadline is year-end – build a vendor-tagging and ageing system well before 31 March.