ITA 1961 · Section 43B

Section 43B — Certain Deductions Only on Actual Payment

Chapter IV-D — Profits and Gains of Business or ProfessionITA 1961Up to AY 2025-26

Function in the statutory architecture

Statutory text — Income-tax Act, 1961

CHAPTER IV

COMPUTATION OF TOTAL INCOME / D. PGBP

Certain deductions to be only on actual payment.

43B. Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of—

(a) any sum payable by the assessee by way of tax, duty, cess or fee, by whatever name called, under

any law for the time being in force, or

(b) any sum payable by the assessee as an employer by way of contribution to any provident fund or

superannuation fund or gratuity fund or any other fund for the welfare of employees, or

(d) any sum payable by the assessee as interest on any loan or borrowing from any public financial

institution or a State financial corporation or a State industrial investment corporation, in accordance with the terms and conditions of the agreement governing such loan or borrowing , or

(da) any sum payable by the assessee as interest on any loan or borrowing from 20[such class of

non-banking financial companies as may be notified by the Central Government in the Official Gazette in this behalf], in accordance with the terms and conditions of the agreement governing such loan or borrowing, or

(e) any sum payable by the assessee as interest on any loan or advances from a scheduled bank or a

co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank in accordance with the terms and conditions of the agreement governing such loan or advances, or

(f) any sum payable by the assessee as an employer in lieu of any leave at the credit of his employee,

(g) any sum payable by the assessee to the Indian Railways for the use of railway assets, 21[or]

21[(h) any sum payable by the assessee to a micro or small enterprise beyond the time limit specified in

section 15 of the Micro, Small and Medium Enterprises Development Act, 2006 (27 of 2006),]

shall be allowed (irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him) only in computing the income referred to in section 28 of that previous year in which such sum is actually paid by him :

Provided that nothing contained in this section 21[[except the provisions of clause (h)]] shall apply in relation to any sum which is actually paid by the assessee on or before the due date applicable in his case for furnishing the return of income under sub-section (1) of section 139 in respect of the previous year in which the liability to pay such sum was incurred as aforesaid and the evidence of such payment is furnished by the assessee along with such return.

Explanation1.—For the removal of doubts, it is hereby declared that where a deduction in respect of any sum referred to in clause (a) or clause (b) of this section is allowed in computing the income referred to in section 28 of the previous year (being a previous year relevant to the assessment year commencing on the 1st day of April, 1983, or any earlier assessment year) in which the liability to pay such sum was incurred by the assessee, the assessee shall not be entitled to any deduction under this section in respect of such sum in computing the income of the previous year in which the sum is actually paid by him.

Explanation 2.—For the purposes of clause (a), as in force at all material times, "any sum payable" means a sum for which the assessee incurred liability in the previous year even though such sum might not have been payable within that year under the relevant law.

Explanation 3.—For the removal of doubts it is hereby declared that where a deduction in respect of any

sum referred to in clause (c) or clause (d) of this section is allowed in computing the income referred to in section 28 of the previous year (being a previous year relevant to the assessment year commencing on the 1st day of April, 1988, or any earlier assessment year) in which the liability to pay such sum was incurred by the assessee, the assessee shall not be entitled to any deduction under this section in respect of such sum in computing the income of the previous year in which the sum is actually paid by him.

Explanation 3A.—For the removal of doubts, it is hereby declared that where a deduction in respect of any sum referred to in clause (e) of this section is allowed in computing the income referred to in section 28 of the previous year (being a previous year relevant to the assessment year commencing on the 1st day of April, 1996, or any earlier assessment year) in which the liability to pay such sum was incurred by the assessee, the assessee shall not be entitled to any deduction under this section in respect of such sum in computing the income of the previous year in which the sum is actually paid by him.

Explanation 3AA.—For the removal of doubts, it is hereby declared that where a deduction in respect of any sum referred to in clause (da) is allowed in computing the income referred to in section 28, of the previous year (being a previous year relevant to the assessment year commencing on the 1st day of April, 2019, or any earlier assessment year) in which the liability to pay such sum was incurred by the assessee, the assessee shall not be entitled to any deduction under this section in respect of such sum in computing the income of the previous year in which the sum is actually paid by him.

Explanation 3B.—For the removal of doubts, it is hereby declared that where a deduction in respect of any sum referred to in clause (f) of this section is allowed in computing the income, referred to in section 28, of the previous year (being a previous year relevant to the assessment year commencing on the 1st day of April, 2001, or any earlier assessment year) in which the liability to pay such sum was incurred by the assessee, the assessee shall not be entitled to any deduction under this section in respect of such sum in computing the income of the previous year in which the sum is actually paid by him.

Explanation 3C.—For the removal of doubts, it is hereby declared that a deduction of any sum, being interest payable under clause (d) of this section, shall be allowed if such interest has been actually paid and any interest referred to in that clause which has been converted into a loan or borrowing or debenture or any other instrument by which the liability to pay is deferred to a future date shall not be deemed to have been actually paid.

Explanation 3CA.—For the removal of doubts, it is hereby declared that a deduction of any sum, being interest payable under clause (da), shall be allowed if such interest has been actually paid and any interest referred to in that clause which has been converted into a loan or borrowing or debenture or any other instrument by which the liability to pay is deferred to a future date shall not be deemed to have been actually paid.

Explanation 3D.—For the removal of doubts, it is hereby declared that a deduction of any sum, being interest payable under clause (e) of this section, shall be allowed if such interest has been actually paid and any interest referred to in that clause which has been converted into a loan or advance or debenture or any other instrument by which the liability to pay is deferred to a future date shall not be deemed to have been actually paid.

Explanation 4.—For the purposes of this section,—

(a) "public financial institutions" shall have the meaning assigned to it in section 4A of the Companies

Act, 1956 (1 of 1956);

(aa) "scheduled bank" shall have the meaning assigned to it in the Explanation to clause (iii) of

sub-section (5) of section 11;

(b) "State financial corporation" means a financial corporation established under section 3 or section

3A or an institution notified under section 46 of the State Financial Corporations Act, 1951 (63 of 1951);

section 617 of the Companies Act, 1956 (1 of 1956), engaged in the business of providing long-term finance for industrial projects and eligible for deduction under clause (viii) of sub-section

(1) of section 36;

(d) "co-operative bank", "primary agricultural credit society" and "primary co-operative agricultural

and rural development bank" shall have the meanings respectively assigned to them in the

Explanation to sub-section (4) of section 80P;

22[(e) "micro enterprise" shall have the meaning assigned to it in clause (h) of section 2 of the Micro,

Small and Medium Enterprises Development Act, 2006 (27 of 2006);]

(f) "non-banking financial company" shall have the meaning assigned to it in clause (f) of section 45-I

of the Reserve Bank of India Act, 1934 (2 of 1934);

22[(g) "small enterprise"shall have the meaning assigned to it in clause (m) of section 2 of the Micro,

Small and Medium Enterprises Development Act, 2006 (27 of 2006).]

Explanation5.—For the removal of doubts, it is hereby clarified that the provisions of this section shall not apply and shall be deemed never to have been applied to a sum received by the assessee from any of his employees to which the provisions of sub-clause (x) of clause (24) of section 2 applies.

— Footnotes (gazette text) —

20. Sub. for "a deposit taking non-banking financial company or systemically important non-deposit

taking non-banking financial company" by Act No. 08 of 2023, w.e.f. 1-4-2024.

21. Ins., ibid.

22. Sub. by Act No. 08 of 2023, w.e.f. 1-4-2024.

— Source —

Verbatim text reproduced from income-tax-act-1961-as-amended-by-finance-act-2025.pdf (full layout extract, 0-indexed lines 11671-11804). Reproduced under Standard B (gazette-text discipline) — gazette content, French-style colon spacing, italics-for-Provisos/Explanations convention, and *N. footnote-numbering preserved.

PDF-extraction artifacts repaired: per-page header (“INCOME-TAX ACT, 1961 - 2024”), per-page footer, 2+ consecutive blank lines at page-break boundaries collapsed to a single blank, orphaned footnote-marker joining.

Finance Act 2026 overlay: not applicable. FA 2026 amends 14 sections of the 1961 Act (92CA, 139, 144C, 153B, 220, 222, 245, 245MA, 254, 275A, 275B, 276, 278A, 280) — this section is not among them.

Parallel provisions — Income-tax Act, 2025 mapping

Income-tax Act, 1961	Income-tax Act, 2025 / Allied Sources
s. 43B — Notwithstanding anything contained in any other provision: deduction OTHERWISE allowable in respect of (a) tax / duty / cess / fee / etc.; (b) employer's contribution to PF / superannuation / gratuity / NPS; (c) bonus or commission to employees for services rendered; (d) interest on loan/borrowing from public financial institution / SLB / co-op land mortgage bank etc.; (e) interest on loan from scheduled bank / co-op bank; (f) leave encashment payable to employees; (g) MSME payments [FA 2023]; (h) any sum payable by the assessee — shall be allowed ONLY in the PY in which it is actually PAID.	s. 35 of the 2025 Act — Same anti-accrual framework.
First proviso — Payment made on or before s. 139(1) due date — deemed paid in the PY of liability (provides timing relief).	Same.
Second proviso — interest on bank/PFI loan converted into loan / advance — NOT deemed actual payment.	Same anti-conversion rule.
FA 2023 added clause (h) for MSME payments — payment to micro/small enterprise beyond 45 days disallowed unless paid by s. 139(1) due date.	Same.

Cross-references — Rules, Constitution, allied statutes:

■ FA 2003 — added clauses (e), (f) — interest on bank loans, leave encashment.

■ FA 2021 — Explanation 2: 'actual payment' construed strictly — book entries are not payment.

■ FA 2023 — clause (h) MSME framework, anchored on MSME Act 2006.

■ Anti-tax-avoidance: prevents assessees from claiming deduction on accrual basis while never actually remitting the tax / fund / loan-interest / employee-payment.

Function in the statutory architecture

Section 43B is the anti-accrual rule. Specified categories of expenditure (taxes, employer fund contributions, employee bonus / commission / leave encashment, bank interest, MSME payments) are deductible ONLY on actual payment, not on accrual. The first proviso provides timing relief: payment before s. 139(1) due date is deemed paid in the year of liability. The provision prevents the cash-vs-mercantile-method gaming that otherwise allowed assessees to claim deduction without actual remittance.

Historical context / FA amendment trail

Inserted by FA 1983, w.e.f. 1-4-1984, originally targeting tax/duty/cess defaults. Major expansions: FA 1989 (employer fund contributions); FA 2003 (bank interest + leave encashment); FA 2017 (employee bonus / commission); FA 2021 — Explanation 2 strict construction of 'actual payment'; FA 2023 — clause (h) MSME payments. The first proviso (s. 139(1) due-date relief) has been substantively stable since enactment, but its operation has been litigated extensively (Alom Extrusions, Sagun Foundry — for s. 36(1)(va) but informing s. 43B too).

Operative consequences

• Cash basis for the specified categories — accrual does NOT suffice.

• First proviso: payment by s. 139(1) due date deemed paid in year of liability (timing relief).

• Anti-conversion: bank interest converted into loan / advance NOT deemed paid (second proviso).

• FA 2023 MSME (clause h): payments to micro/small enterprises beyond 45 days disallowed unless paid by s. 139(1) due date.

• FA 2021 Explanation 2: 'actual payment' strictly construed — book entries / journal vouchers not sufficient.

• Operates in conjunction with s. 40(a) TDS default rules — both can disallow the SAME payment for different reasons.

Case Laws & Commentary

SECTION 43B — Certain deductions to be only on actual payment

Important Case Laws — 1961 Treatise (FA 2026)

Provision in brief: Overrides accrual method — these payments allowable only in PY of actual payment (or by s. 139(1) due date for AY in which expense accrued): (a) any tax, duty, cess or fee under any law (Central/State); (b) employer's PF, super-annuation, gratuity, other welfare-fund contribution; (c) bonus/commission to employees not payable as profits / dividend; (d) interest on loan/borrowing from public financial institution, state FI / state industrial investment corporation; (da) interest on loan from scheduled bank/co-op bank (FA 2017); (e) interest on loan from NBFC (added FA 2022); (f) leave-encashment to employees (post FA 2001 / w.e.f. AY 2002-03); (g) ['payment to railways' — added later]; (h) amount payable to MICRO or SMALL enterprise beyond timeline u/s 15 of MSMED Act (FA 2023, AY 2024-25 onwards) — also note proviso to s. 43B explicitly excludes s. 43B(h) from the s. 139(1) safety-valve, making MSME-payment a HARD timeline.

Section Commentary

Statutory-payment overrides accrual

Section 43B is the single most-litigated PGBP provision after s. 37. It overrides the accrual method: specified categories of expense are allowable ONLY in the year of ACTUAL PAYMENT — irrespective of the year of accrual in books. Object: ensure that taxes, duties, employee welfare contributions, interest on institutional borrowings, leave-encashment, and (post-FA 2023) payments to MSEs are actually disbursed before the corresponding tax shield is granted. The first proviso provides a SAFE-HARBOUR — payment on or before the due date u/s 139(1) for filing return of the AY in which expense accrued counts as 'paid' for that AY (subject to documentary evidence).

Categories — clauses (a) to (h)

(a) Any tax, duty, cess or fee under any law; (b) Employer's contribution to PF / super-annuation / gratuity / other employee welfare fund; (c) Bonus / commission to employees not payable as profit / dividend; (d) Interest on loan / borrowing from public financial institution, state FI / SIIC; (da) Interest on loan from scheduled bank / co-op bank (FA 2017); (e) Interest on loan from NBFC (FA 2022); (f) Leave encashment to employees (FA 2001); (g) Payment to railway; (h) Amount payable to MICRO or SMALL enterprise beyond MSMED timeline (FA 2023). The list has expanded steadily by accretion.

First proviso safe-harbour — Allied Motors retro

Allied Motors (SC 1997) settled that the first proviso (inserted by FA 1987) is RETROSPECTIVE from the introduction of s. 43B (1.4.1984) — being curative. The proviso permits deduction if actually paid before s. 139(1) due date. This is the workhorse of year-end tax planning for clients with significant indirect-tax / statutory-dues accruals.

Alom Extrusions — FA 2003 employer-PF retro

Alom Extrusions (SC 2009) held that the FA 2003 omission of the second proviso (which had imposed stricter timing on employer PF / super-annuation) is RETROSPECTIVE. Thus employer's contributions deposited by s. 139(1) due date qualify even for pre-2004 AYs. Curative-amendment doctrine in full operation.

Checkmate Services — employee PF / ESI carve-out

Checkmate Services (SC 2022) — the most important recent case. EMPLOYEE'S contribution to PF / ESI deducted from wages is NOT within s. 43B. It is exclusively governed by s. 36(1)(va) requiring strict deposit by due date under the respective welfare law. Section 43B safe-harbour does NOT rescue late employee-contribution. FA 2021 inserted Expln 5 to s. 43B codifying this distinction. Combined effect: employer's own contribution gets s. 43B grace; employee's contribution deducted from wages has no grace — strict statutory deadline. This is the single biggest TDS/payroll compliance trip-wire post-2022.

Leave encashment — Bharat Earth Movers / Exide arc

Bharat Earth Movers (SC 2000) had treated provision for leave encashment as an ascertained liability (deductible on accrual). FA 2001 inserted s. 43B(f) reversing this — leave-encashment is allowable only on actual payment. Exide Industries (SC 2020) upheld constitutional validity of s. 43B(f). The pre-2001 mercantile-method freedom is gone.

MSME — s. 43B(h) (FA 2023) — special design

FA 2023 inserted s. 43B(h) — amounts payable to MICRO or SMALL enterprises (as defined u/s 2(h) MSMED Act) beyond the timeline u/s 15 MSMED Act (15 days without agreement; max 45 days with written agreement) are disallowed. CRUCIALLY, the first proviso (s. 139(1) safe-harbour) does NOT apply to s. 43B(h) — making it a HARD deadline. If payment is not made within MSMED timeline, deduction is deferred to year of actual payment. Applicable from AY 2024-25. This is a major change requiring MSME-vendor identification, payment-tracking, and possibly contract-term renegotiation.

CA priority checklist

(i) Quarterly TDS / GST / statutory-payment reconciliation. (ii) Employee PF / ESI — payroll-software alert for monthly deadlines; the Checkmate trap is fatal. (iii) Leave encashment — annual settlement preferred to year-end provision. (iv) MSME vendor identification: maintain Udyam-Registration-verified master; payment-aging alerts at 30 / 40 / 45 days. (v) For NBFC interest, ensure actual payment by year-end / s. 139(1) due date. (vi) Form 3CD Cls. 26 captures s. 43B items.

FA 2026 impact: No fresh FA 2026 amendment. FA 2023 inserted s. 43B(h) for MSME with carve-out from the s. 139(1) safe harbour — applicable from AY 2024-25. FA 2021 inserted Expln 5 clarifying that s. 43B does NOT apply to employee-PF/ESI (read with Checkmate Services).

Leading Decisions

1. Allied Motors (P) Ltd. v. CIT

Citation: (1997) 224 ITR 677 (SC)