When it comes to business taxation in India, Section 43B of the Income Tax Act is one of the most crucial provisions that every entrepreneur, tax professional, and accountant must understand. Introduced to plug tax leakages and ensure timely payments, this section affects the computation of business income directly.
In this blog, we’ll break down Section 43B in a simple, clear way — with real-world examples, easy explanations, and a complete list of allowable expenses under this section. Whether you’re filing your return or advising a client, this guide will help you stay compliant and informed.
💡 What is Section 43B of Income Tax Act?
Section 43B of the Income Tax Act, 1961 allows certain deductions in the computation of income under the head “Profits and Gains of Business or Profession” only on actual payment basis and not on accrual basis.
In simple terms, even if an expense is recorded in the books, you can claim it as a tax deduction only when it is actually paid.
🧾 Why Was Section 43B Introduced?
Before Section 43B, businesses used to claim expenses in one financial year but delayed the actual payment. This manipulated profits and reduced taxes in the short term.
To counter this, Finance Act, 1983 introduced Section 43B to ensure that certain expenses are allowed only when paid, improving transparency and compliance.
✅ List of Deductions Allowed Only on Actual Payment
Here are the expenses covered under Section 43B that are allowed only on actual payment, regardless of when they are accounted in the books:
| Type of Expense | Explanation |
|---|---|
| Tax, Duty, Cess or Fee | Any tax payable to the government |
| Employer Contribution to Provident Fund/ESI | Allowed only if paid before due date |
| Bonus or Commission to Employees | Not deductible unless paid |
| Interest on Loans from Public Financial Institutions | Deductible only on actual payment |
| Leave Encashment | Allowed only in the year of actual payment |
| Payment to Indian Railways for Use of Assets | Deductible on payment basis only |
| GST Liability (if not paid) | GST input reversal may apply; payment needed for claiming deduction |
📘 Important Amendments to Section 43B
Several amendments have shaped this section over the years:
- Finance Act 2023: Introduced a provision to include payments to MSMEs (Micro, Small & Medium Enterprises) under 43B if not paid within 45 days.
- Amendment Related to GST: Ensures disallowance of GST input tax credit if payment is not made within 180 days.
Always check for the latest changes via CBDT circulars or consult a tax expert.
📊 Section 43B Explained with Example
Example 1 – PF Contribution
A company, XYZ Pvt. Ltd., deducted ₹50,000 from employee salaries as PF for March 2024, but paid it in June 2024 (after the due date).
- Claim Allowed? ❌ No
- Why? Because payment was made after the due date under the PF Act. Under Section 43B, only timely payment qualifies for deduction.
Example 2 – Bonus Payment
ABC Ltd. declared ₹1 lakh as bonus in March 2024 and paid it in April 2024 (before filing ITR).
- Claim Allowed? ✅ Yes
- Why? Because payment was made before the due date of filing the return under section 139(1).
Example 3 – GST Liability
You record GST liability in March 2024 but fail to pay it till November 2024.
- Claim Allowed? ❌ No
- Why? Under 43B and GST rules, GST must be paid to claim deduction and ITC.
🧠 Impact of Section 43B on Tax Planning
Here’s how businesses use Section 43B for smarter tax planning:
- ✅ Ensure timely payments of PF, ESI, and taxes to avoid disallowance.
- ✅ Plan bonus or commissions before return filing date to claim in the same year.
- ✅ Avoid booking expenses late in March without actual payments.
- ❌ Don’t assume accrued expenses will always reduce tax liability.
Section 43B is a reminder to align financial accounting with real cash flow.
🗓️ Due Date for Payment to Claim Deduction
To claim a deduction under Section 43B for any expense:
- Option 1: Make the payment before 31st March of the financial year.
- Option 2: If not paid by 31st March, then pay it before the due date of filing the return (usually 31st October).
Note: PF & ESI must be paid within their respective due dates under respective laws, not just before return filing.
📌 Section 43B and GST – What You Must Know
Under the GST framework, Section 43B interacts closely with Input Tax Credit (ITC):
- If you don’t pay the GST to the supplier within 180 days, ITC is reversed.
- Any unpaid GST liability recorded must be paid to claim deduction under Section 43B.
This means timely GST compliance affects both your ITC and tax deductions.
❌ Common Mistakes & How to Avoid Them
Here are some frequent errors and their solutions:
| Mistake | How to Avoid It |
|---|---|
| Booking PF/ESI in March but delaying payment | Pay on or before the due date under respective Acts |
| Declaring bonus but forgetting to pay before return | Set reminders for timely disbursal |
| Claiming deduction for unpaid GST liability | Ensure GST is fully paid before claiming deduction |
| Ignoring MSME payment timelines (under 45 days) | Record vendor type & set payment alerts |
🙋♂️ FAQs on Section 43B of Income Tax Act
1. Can I claim deduction if I pay after March but before filing return?
Yes, except for PF and ESI. Other expenses like bonus, interest, etc., can be claimed if paid before the return filing due date.
2. Is Section 43B applicable to all businesses?
Yes, it applies to all taxpayers computing income under the head “Profits and Gains of Business or Profession.”
3. What happens if an expense is disallowed under Section 43B?
It will be added back to your taxable income, increasing your tax liability.
4. Can GST payments be claimed if paid late?
Yes, but deduction is allowed only in the year of actual payment.
🔚 Conclusion: Why Section 43B Matters
Section 43B of the Income Tax Act is not just another technical provision — it’s a crucial guardrail that ensures transparency, timely tax compliance, and genuine expense claims.
For any business owner or finance professional, understanding this section can save penalties, reduce disallowances, and improve cash flow planning.
Always remember:
“Expense is not deductible just because it’s recorded. It must be paid!”