Unpaid MSME Supplier Bills Can Cost You Your Tax Deduction: The 45-Day Rule
If you owe a micro or small enterprise and do not pay within 15 days, or the agreed period up to 45 days, the expense is not deductible until the year you pay. Paying before the return due date does not help. Traders and medium enterprises are not covered. The rule continues under the Income-tax Act, 2025.
A business can owe a supplier money at year end and still claim the expense. With micro and small suppliers, that is no longer true. Pay them late and the expense is pushed into the year you actually pay, which can raise this year's tax bill sharply.
The rule
Section 43B(h) of the Income-tax Act, 1961 applied from FY 2024-25. The same rule continues under the Income-tax Act, 2025 from 1 April 2026.
An amount you owe to a micro or small enterprise is deductible only in the year you pay it, unless you pay within the time allowed by Section 15 of the MSMED Act:
- ✓15 days from acceptance of the goods or services, if there is no written agreement on credit terms;
- ✓the agreed period, but not more than 45 days, if there is a written agreement.
If the time allowed has passed and the bill is still unpaid on 31 March, the expense is added back to that year's income. It is allowed in the year you pay.
Who counts as an MSME supplier here
| Supplier | Covered? |
|---|---|
| Micro or small manufacturer registered on Udyam | Yes |
| Micro or small service provider registered on Udyam | Yes |
| Medium enterprise | No |
| Retail or wholesale trader, even with a Udyam number | No. Traders' Udyam registration is for priority-sector lending only, and the delayed-payment provisions do not apply to them |
| Supplier without Udyam registration | No |
Paying before the return due date does not help
For most items under Section 43B, such as bonus or PF, paying before the due date of the tax return saves the deduction. That relief does not apply here. A bill paid in May or June for goods received in January still loses the FY deduction if it was overdue on 31 March.
A worked example
A Hyderabad food processor closes FY 2025-26 with these unpaid bills from micro and small suppliers:
| Supplier | Accepted on | Agreement | Due by | Paid by 31 March? | Effect |
|---|---|---|---|---|---|
| Packaging maker | 5 Feb 2026 | 45 days | 22 Mar 2026 | No | ₹6,00,000 disallowed for FY 2025-26 |
| Machine repair firm | 25 Mar 2026 | 30 days | 24 Apr 2026 | No | Still within the limit, so deductible |
| Spice trader (Udyam) | 10 Jan 2026 | None | n/a | No | Not covered; deductible |
The ₹6,00,000 adds about ₹1,50,000 of tax at a 25% rate this year. It is deductible in FY 2026-27 once paid.
A checklist for your accounts team
- Ask every supplier for their Udyam certificate and record the category (micro, small or medium) and activity (manufacturing, services or trading).
- Put the credit terms in writing. Without a written agreement, the limit is 15 days.
- Record the acceptance date of goods or services, not just the invoice date.
- Run an ageing report every month for MSME suppliers, with days left before the limit.
- Pay MSME suppliers first in the last two weeks of March.
- Tell your tax auditor which bills were overdue on 31 March. The audit report asks for this.
Frequently asked questions
Does it matter if the supplier does not complain?
No. The disallowance follows the law, not the supplier's choice.
What about interest on late payment to MSMEs?
The MSMED Act separately requires compound interest at three times the RBI bank rate on late payments, and that interest is not deductible for tax.
Do partial payments count?
Yes. Only the part still unpaid after the limit is disallowed.
Sources
- ✓Practical insights into Section 43B(h), Taxmann
- ✓FAQs on the buyer's liability under Section 15 of the MSMED Act, Taxmann
- ✓Section 43B(h): applicability and examples, ClearTax
- ✓Section 43B(h) under the Income-tax Act, 2025, TaxUpdate
This is a summary, not legal advice. Confirm with your chartered accountant before you rely on it.
Written by
Founder, Airwix Technologies (Sleet)
Vatsal Sutariya is the founder of Airwix Technologies in Ahmedabad, the company that builds Sleet: SleetHR for HR and payroll, and Sleet Accounting for GST billing and books. He writes about GST, invoicing, business tax and choosing software for Indian businesses, and checks each rule against the official notification before it is published.
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