Last reviewed: 25 September 2026. Section 43B(h) changed the game for anyone buying from micro and small suppliers: pay them late, and you lose the tax deduction for that expense until you actually pay. This guide explains the 15/45-day rule, which suppliers it covers, the interest exposure under the MSMED Act, and how buyers should manage payment cycles to avoid a year-end tax shock.
At a glance
How the rule works
If you do not pay a registered micro or small supplier within the agreed period (capped at 45 days), or within 15 days where there is no written agreement, the expense cannot be deducted in that year - it is added back to your taxable income and allowed only in the year you actually pay. The clock runs from the day you accept the goods or services, or are deemed to have accepted them. This is a buyer-side tax risk, not a supplier problem.
Who is covered
Only micro and small enterprises registered on Udyam are covered - medium enterprises and unregistered suppliers are not. Traders are also outside the rule. Wholesale and retail traders have been allowed to register on Udyam since July 2021, but only for priority-sector lending, and the delayed-payment chapter of the MSMED Act does not apply to them. Check the major activity on the Udyam certificate, not just the word "Micro".
Categories were revised by the notification of 21 March 2025, effective 1 April 2025. An enterprise must meet both tests to fall in a category:
| Category | Investment in plant, machinery or equipment | Annual turnover |
|---|---|---|
| Micro | Up to ₹2.5 crore | Up to ₹10 crore |
| Small | Up to ₹25 crore | Up to ₹100 crore |
| Medium (outside 43B(h)) | Up to ₹125 crore | Up to ₹500 crore |
Our MSME classification checker applies both tests.
Interest and year-end impact
Separately from the income-tax disallowance, section 16 of the MSMED Act charges compound interest with monthly rests at three times the bank rate notified by RBI, from the day after the payment fell due. Section 23 of the MSMED Act then says this interest is not deductible for income-tax at all - a permanent disallowance, not a timing one. At year-end, any overdue payable to a micro or small supplier is disallowed and increases taxable income until settled - so it pays to clear these before 31 March.
Worked example: two invoices at 31 March 2026
A Thane manufacturer has a written 45-day credit agreement with two micro suppliers registered as manufacturers.
| Invoice | Goods accepted | Payment due by | Paid on | FY 2025-26 treatment |
|---|---|---|---|---|
| A: ₹4,00,000 | 20 February 2026 | 6 April 2026 | 5 April 2026 | Deductible in FY 2025-26: paid within 45 days, even though after 31 March |
| B: ₹6,00,000 | 1 January 2026 | 15 February 2026 | 20 May 2026 | ₹6,00,000 disallowed in FY 2025-26; deductible in tax year 2026-27, when paid |
On invoice B, the supplier can also claim MSMED interest from 16 February 2026 to 20 May 2026. Whatever is paid or provided, that interest is never deductible. In the FY 2025-26 tax audit, both invoices are reported in clause 22 of Form 3CD.
A supplier-ageing view that catches this early
| Bucket (days since acceptance) | Status | Action |
|---|---|---|
| 0-15 | Within limit for every supplier | Schedule in the normal run |
| 16-45 | Late if there is no written agreement | Check the agreement; pay no-agreement suppliers now |
| Over 45 | Late for every micro or small supplier | Pay before 31 March; estimate MSMED interest |
What buyers should do
- Tag micro and small suppliers in your vendor master with their Udyam status and major activity.
- Put the credit period in writing; without it, the limit is 15 days.
- Track invoice due dates against the 15/45-day limits, from the acceptance date.
- Prioritise MSME payments, especially near year-end, and provision correctly.
- If you are a company, reconcile the same data with your half-yearly Form MSME-1 filing.
Suppliers chasing overdue amounts can use the Samadhaan route; see our note on delayed-payment recovery through Samadhaan and TReDS.
Frequently asked questions
What is Section 43B(h)?
It is an income-tax rule that allows a buyer to deduct payments to micro and small enterprise suppliers only in the year the payment is actually made, if it is not paid within the time limit under the MSMED Act - so delayed MSME payments lose their tax deduction until settled. From tax year 2026-27 the same rule is section 37(2)(g) of the Income-tax Act, 2025.
What is the payment time limit?
Payment must be made within the period agreed in writing, capped at 45 days from the day of acceptance or deemed acceptance of the goods or services, or within 15 days where there is no written agreement. Beyond that, the deduction is deferred to the year of actual payment.
Which suppliers does it cover?
Only micro and small enterprises registered on the Udyam portal as manufacturers or service providers. Medium enterprises, unregistered suppliers, and wholesale or retail traders registered on Udyam are outside 43B(h).
Are traders registered on Udyam covered?
No. Wholesale and retail traders have been allowed to register on Udyam since July 2021, but only for priority-sector lending. The delayed-payment chapter of the MSMED Act does not extend to them, so payments to a trader supplier do not attract 43B(h), even if the trader holds a Udyam certificate.
How do I know if my supplier is micro or small?
Ask suppliers for their Udyam registration and check the category and the major activity (manufacturing, services or trading) on the certificate. Many buyers now collect Udyam details as part of vendor onboarding and ask for a fresh declaration each year, because the category can change.
Does interest apply on late payment?
Yes. Section 16 of the MSMED Act charges compound interest with monthly rests at three times the bank rate notified by RBI, from the day after the payment was due. Section 23 of the MSMED Act says that interest is never deductible for income-tax, whether or not you pay it. This is separate from the 43B(h) timing disallowance.
From when does 43B(h) apply?
It applies from the financial year 2023-24 onwards. For FY 2025-26 tax audits it is still section 43B(h); from tax year 2026-27 it is section 37(2)(g) of the Income-tax Act, 2025.
How does it affect year-end accounts?
At year-end, any outstanding payable to a micro or small supplier that is beyond the time limit is disallowed and added back to taxable income until paid, which can increase the tax outgo. The tax auditor reports it in clause 22 of Form 3CD.
How should buyers manage this?
Identify MSME suppliers, track invoice due dates against the 15/45-day limits, prioritise their payments before year-end, and keep Udyam records to support the treatment.
We identify your MSME suppliers, review payment cycles and quantify the disallowance risk before it hits your tax.
MSME 43B(h) Payment ReviewBookkeepingTalk to CA Somesh Chandak & Associates - we manage MSME 43B(h) payment and tax risk.
WhatsAppLinkedInSchedule a callDisclaimer: This article is for general guidance only and is not a substitute for advice on your specific facts and the latest law. Please consult before acting.