Section 43B(h) Explained: The 45-Day MSME Payment Rule Every Business Must Know

If you buy goods or services from an MSME-registered supplier and pay after 45 days, you cannot deduct that expense from your taxable income. The money you spent is real, but the tax benefit disappears.

This is Section 43B(h) of the Income Tax Act — a rule that changed how businesses across India manage their payables to small suppliers. Whether you are a buyer or a supplier, understanding this rule is critical for your finances.

What Is Section 43B(h)?

Section 43B(h) was introduced by the Finance Act 2023 and became effective from April 1, 2024. It adds a new condition for businesses to claim tax deductions on payments made to Micro and Small Enterprises (MSEs).

The time limits under MSMED Act:

• With a written agreement: Payment must be made within the agreed period, which cannot exceed 45 days from the date of acceptance of goods/services
• Without a written agreement: Payment must be made within 15 days from the date of acceptance

If you miss these deadlines, the expense is disallowed in the current financial year. You can only claim the deduction in the year you actually pay.

Who Does This Apply To?

Key clarification: This rule applies to Micro and Small Enterprises only — not Medium Enterprises. The MSME classification is based on investment in plant/machinery and annual turnover:

How the 45-Day Rule Works — A Practical Example

The tax impact of Scenario B:

If your company is in the 30% tax bracket, paying 40 days late on a ₹10 lakh purchase costs you:

• ₹10,00,000 × 30% = ₹3,00,000 in deferred tax benefit
• You do not lose the deduction permanently — it shifts to the next financial year
• But the time value of money means you are effectively paying more in taxes this year

Compliance Checklist for Buyers

If your business purchases from MSME suppliers, follow this checklist to stay compliant:

1. Identify your MSME suppliers. Check if your suppliers are registered on the Udyam portal. Ask for their Udyam Registration Number (URN). Maintain a list of all MSME suppliers separately in your accounts.

2. Track payment deadlines. For every purchase from an MSME supplier, note the acceptance date and calculate the 45-day (or 15-day) deadline. Set up reminders or use automated tracking.

3. Review your agreements. If you have written agreements with MSME suppliers, ensure the payment terms do not exceed 45 days. Agreements with terms beyond 45 days are void under the MSMED Act.

4. Reconcile before year-end. Before March 31, reconcile all MSME payables. Any amount unpaid beyond 45 days must be added back to your taxable income for that year.

5. Maintain documentation. Keep records of: purchase dates, acceptance dates, payment dates, supplier Udyam registration numbers, and copies of agreements.

How MSME Suppliers Can Use 43B(h) as Leverage

If you are an MSME supplier, Section 43B(h) gives you a powerful tool to collect payments faster. Your buyers now have a direct financial incentive to pay you on time — if they do not, they lose tax deductions.

How to use it in payment reminders:

Dear [Buyer Name], your payment of ₹[Amount] has been pending for [X] days. As per Section 43B(h) of the Income Tax Act, MSME payments made beyond 45 days are not eligible for tax deduction in the current financial year. Timely settlement benefits both parties. Please clear via UPI: [Payment Link].

This is not a threat — it is tax information that genuinely helps your buyer. Many larger businesses are not fully aware of the 43B(h) implications until their chartered accountant flags it during filing.

Include your Udyam Registration Number in your invoices and payment reminders. This makes it clear that you are a registered MSME and that the 45-day rule applies.

Interest on Delayed MSME Payments

Beyond the tax deduction issue, the MSMED Act 2006 also requires buyers to pay compound interest on delayed payments to MSMEs:

• Interest rate: three times the bank rate notified by RBI (currently around 18-20% per annum)
• Interest period: from the appointed payment date to the actual date of payment
• This interest is not tax deductible for the buyer under Section 23 of the MSMED Act

Use our Late Payment Interest Calculator to calculate the exact interest amount on any delayed MSME payment — it includes 43B(h) compliance checking built in.

Frequently Asked Questions

Does 43B(h) apply to payments made before April 1, 2024? No. The provision is effective from Assessment Year 2024-25, meaning it applies to income earned from April 1, 2023 onwards. However, practical enforcement has been most active from FY 2024-25.

What if my supplier is not registered on Udyam? If the supplier does not have a valid Udyam Registration, Section 43B(h) does not apply to payments made to them. The rule specifically covers registered Micro and Small Enterprises.

Can I extend the 45-day limit by contract? No. Under the MSMED Act, the payment period cannot exceed 45 days even by mutual agreement. Any contract specifying a longer period is void to the extent it exceeds 45 days.

What about advance payments? Advance payments made before the supply date are not affected by 43B(h). The 45-day clock starts from the date of acceptance of goods/services, not the date of order.

Does this apply to services or only goods? Both. Section 43B(h) covers payments to MSMEs for both goods and services.

The Bottom Line

Section 43B(h) fundamentally changed the payment dynamics between businesses and MSME suppliers. For buyers, the message is clear: pay your MSME suppliers within 45 days or lose your tax deduction. For MSME suppliers, this is leverage you should use in every overdue payment conversation.

The simplest way to stay compliant — whether you are a buyer tracking deadlines or a supplier sending reminders — is to automate. GetPaidly tracks due dates, sends automatic WhatsApp reminders with UPI links, and keeps both sides informed. No spreadsheets, no missed deadlines, no lost deductions.