Section 43B of Income Tax Act - Payments allowed on Actual payment

Section 43B of the Income Tax Act, 1961 is a special provision that allows certain business expenses as tax deductions only when they are actually paid, and not merely when they are accrued or recorded in the books. This section was introduced to stop businesses from claiming deductions on statutory and other important dues without paying them on time. It mainly applies to taxes, duties, statutory contributions, interest and employee-related payments, ensuring better tax discipline and timely payments to the government and welfare funds.

What is Section 43B of the Income Tax Act

Section 43B states that specific expenses are deductible only in the year in which they are actually paid, irrespective of the accounting method (cash or accrual) followed by the taxpayer.

Even if an expense is recorded in the books in a particular year, the deduction is not allowed unless the payment is made within the permitted time limit. This rule is especially important for businesses that follow the mercantile system of accounting.

Why was Section 43B introduced?

Before Section 43B, many businesses claimed deductions for expenses like taxes or employee contributions without paying them for long periods. This resulted in:

• Delay in payment of statutory dues
• Misuse of deductions to reduce taxable income
• Loss of revenue to the government

Section 43B ensures that tax benefits are linked to actual cash outflow, promoting timely compliance.

Payments covered under Section 43B

The following expenses are covered under Section 43B and are allowed as deduction only on actual payment:

1. Tax, Duty, Cess or Fee

Any sum payable by way of:

• GST
• Excise duty
• Customs duty
• VAT
• Professional tax
• Any other statutory levy

These are deductible only when actually paid.

2. Employer’s Contribution to Welfare Funds

Amounts payable by the employer towards:

• Provident Fund (PF)
• Employees’ State Insurance (ESI)
• Superannuation fund
• Gratuity fund

Deduction is allowed only if payment is made within the due date specified under the respective laws.

3. Bonus or Commission to Employees

Bonus or commission payable to employees is allowed as deduction only when:

• It is actually paid, and
• It is not otherwise payable as profit or dividend.

4. Interest on Loans from Specified Institutions

Interest payable on loans or borrowings from:

• Public financial institutions
• State financial corporations
• State industrial investment corporations

Deduction is allowed only when interest is actually paid.

5. Interest on Loans from Banks and NBFCs

Interest payable to:

• Scheduled banks
• Co-operative banks
• Non-Banking Financial Companies (NBFCs)

This interest is deductible only on payment basis.

6. Leave Encashment

Any amount payable by the employer towards leave encashment is allowed as a deduction only when actually paid.

Important Rule: Payment Before Filing Return

A key relief under Section 43B is:

If the payment is made on or before the due date of filing the income tax return under Section 139(1), then the deduction is allowed in the same financial year, even if payment is made after the year-end.

This benefit does not apply to employee contributions to PF/ESI, which have stricter rules.

Section 43B vs Section 36(1)(va)

Many taxpayers confuse these two sections:

• Section 43B - Applies mainly to employer contributions and statutory dues
• Section 36(1)(va) - Applies to employee contributions (PF, ESI, etc.)

Employee contributions must be deposited within the due date under the respective labour laws, otherwise deduction is disallowed, even if paid before filing the return.

Practical Example

Example 1: GST Payment

A company records GST payable of ₹1,00,000 in March 2025.
It pays the GST in July 2025, before filing the income tax return.

Deduction is allowed for FY 2024-25 because payment was made before the return filing due date.

Example 2: PF Employer Contribution

Employer PF of ₹50,000 for March 2025 is paid in April 2025 within PF due date.

Deduction allowed in FY 2024-25.

Example 3: Employee PF Contribution

Employee PF of ₹30,000 is paid after the PF due date.

Deduction is not allowed, even if paid before filing income tax return.

Impact on Businesses

Section 43B directly affects:

• Tax planning
• Cash-flow management
• Compliance discipline

Businesses must track statutory payments carefully to avoid losing deductions and increasing taxable income.

Key Compliance Tips

• Always track due dates for statutory payments
• Separate employer and employee contributions clearly
• Ensure payments are made before return filing, wherever permitted
• Maintain proof of payment for audit and assessment

Conclusion

Section 43B of the Income Tax Act ensures that important statutory and employee-related payments are claimed as deductions only when actually paid. It promotes timely compliance, prevents misuse of deductions, and strengthens financial discipline among businesses. By understanding which payments fall under this section and paying them within the allowed time limits, taxpayers can avoid disallowances and manage their tax liability more efficiently.