Section 43B(h) and the 45-Day MSME Payment Rule, Explained for 2026

If you supply goods or services to other businesses and you’re registered on Udyam as a micro or small enterprise, one rule gives you more leverage than any reminder you will ever write: a buyer who pays you late can lose the tax deduction for that purchase until the year they actually pay. That rule is Section 43B(h), and it turns “we’ll pay next quarter” into a cost for your customer.

This guide covers who the rule protects, the two payment deadlines, what a late payment costs the buyer, and what to put on your invoices and reminders so buyers take it seriously.

Short version: pay a micro or small supplier within the credit period agreed in writing (never more than 45 days), or within 15 days if there’s no written agreement. Miss that, and anything still unpaid on 31 March is added back to the buyer’s taxable income for that year, while the supplier can claim compound interest at three times the RBI Bank Rate.

Where the rule comes from

Section 43B(h) was added to the Income-tax Act, 1961 by the Finance Act, 2023 and has applied since the financial year 2023-24. It works by pointing at the payment deadlines in Section 15 of the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006: if a buyer pays a micro or small enterprise after that deadline, the buyer can claim the expense only in the year the payment is actually made.

From 1 April 2026 the Income-tax Act, 2025 replaced the 1961 Act. Tax commentators place the same rule in Section 37 of the new Act (clause 37(2)(g), the “actual payment” deductions), with the substance unchanged. Most businesses and accountants still call it “43B(h)”, so this guide does too.

Who it covers

Suppliers that are protected

• Micro and small enterprises registered on Udyam as manufacturers or service providers.
• Not medium enterprises, and not suppliers without Udyam registration.
• Wholesale and retail traders who registered on Udyam (allowed for priority-sector lending) are generally treated as outside the delayed-payment provisions. If you’re a trader, check with your chartered accountant before relying on the rule.

Buyers that feel it

• Businesses that claim the purchase as a business expense: companies, firms, LLPs, and proprietors keeping accounts on the accrual (mercantile) basis.
• A customer buying for personal use has no deduction to lose, so the tax lever doesn’t apply to them (the MSMED Act’s interest rules still talk about “buyers” in general, but in practice you’ll use them against businesses).

The two deadlines

Credit terms	The buyer must pay
In writing	By the agreed date, never more than 45 days after acceptance
Not in writing	Within 15 days of acceptance

“Acceptance” usually means the day the goods are delivered or the service is rendered. If the buyer objects in writing within 15 days of delivery, the clock starts when you resolve the objection instead. A written agreement for 60 or 90 days doesn’t extend the deadline: for these provisions the limit is 45 days.

What a late payment costs the buyer

1. The year-end tax hit. Paying late inside the same financial year changes nothing for tax. The bite comes on 31 March: any amount owed to a micro or small supplier that is past its Section 15 deadline and still unpaid is disallowed for that year and becomes deductible only in the year it is paid. For a business with ₹10 lakh of overdue MSE bills at year-end, that’s ₹10 lakh of extra taxable profit for the year.

Example: an invoice dated 1 February 2027 on 30-day written terms is due on 3 March 2027. If it’s still unpaid on 31 March 2027, the buyer can’t claim it for FY 2026-27. An invoice dated 1 March 2027 on 45-day terms isn’t due until 15 April 2027, so it isn’t caught at that year-end.

2. Compound interest, which they can’t deduct. Under Section 16 of the MSMED Act, the buyer owes compound interest with monthly rests at three times the RBI Bank Rate from the day after the deadline, whatever the contract says. The RBI set the Bank Rate at 5.75% on 7 October 2026, so the rate is 17.25% a year. Section 23 of the Act makes that interest non-deductible for the buyer.

Example: ₹1,00,000 on 30-day terms, paid 45 days after the deadline, carries about ₹2,164 of interest (monthly compounding at 17.25%). Run your own numbers with the MSMED interest calculator.

3. A formal claim. If a buyer still doesn’t pay, a micro or small supplier can file a case with the state’s MSE Facilitation Council through MSME SAMADHAAN. Most disputes never get there: a clear demand letter usually works. The free MSME receivables tracker drafts one with the interest worked out.

What suppliers should do

1. Print your Udyam number and status on every invoice. Buyers’ accountants need to know you’re a micro or small enterprise to track you; many only find out at audit time.
2. Agree credit terms in writing, at 45 days or less. Without a written agreement the deadline is 15 days, which is stricter for the buyer, but a clear written term avoids arguments about which applies.
3. Remind before the deadline, not after. A polite reminder a few days before day 45 that mentions the rule gets paid faster than a stern one on day 90.
4. Chase hardest in February and March. That’s when buyers’ finance teams look at year-end disallowances. A reminder that names the 31 March effect lands differently then.
5. Keep a running list of deadlines. Tracking every invoice’s MSMED date by hand doesn’t scale past a handful of clients.

The free payment tracker does the last part: add your Udyam number in Settings and every overdue invoice shows when its MSMED deadline passed. Pro adds the Section 16 interest due on each invoice and a reminder line that explains the rule to your client in English or Hindi.

What buyers should check

• Ask new vendors whether they’re Udyam-registered micro or small enterprises, and tag them in your accounting software.
• Pay MSE invoices inside the written terms (45 days at most) or within 15 days without terms.
• Before 31 March, list MSE dues that are past their deadline; paying them before the year closes keeps the deduction in the current year.

FAQ

Does the 45-day rule apply to medium enterprises? No. It protects micro and small enterprises only.

Can a supplier and buyer agree on 90 days? They can agree to anything commercially, but for these provisions the deadline can’t go beyond 45 days after acceptance.

Is the MSMED interest tax-deductible for the buyer? No. Section 23 of the MSMED Act disallows it.

What changed on 1 April 2026? The Income-tax Act, 2025 replaced the 1961 Act. The MSE payment rule continues; commentators place it in Section 37 of the new Act. Expect forms and audit reports to use the new references.

Is this legal or tax advice? No. It’s a plain-language summary to help you ask the right questions. Confirm your situation with a chartered accountant.

Related reading

• Udyam registration: how to register and what it unlocks
• TReDS: turn unpaid invoices from large buyers into cash