Businesses purchasing goods or services from registered Micro and Small Enterprises must carefully monitor payment deadlines. Under Section 43B(h) of the Income Tax Act, 1961, applicable to FY 2025-26, expenses payable to eligible micro and small suppliers beyond the prescribed payment period are allowed as a tax deduction only on actual payment.

What Is the Payment Deadline?

Under the MSMED Act, 2006, payment must generally be made within 15 days where there is no written agreement. Where a written agreement specifies a payment period, it cannot exceed 45 days.

If payment is delayed beyond the applicable period, the expense may be disallowed for income-tax purposes in the year of accrual and allowed in the year of actual payment. Importantly, payment before the Income Tax Return filing deadline does not automatically remove this disallowance.

Why Does This Matter to Businesses?

A business may have correctly recorded purchases and expenses in its financial statements but still face a higher taxable income because payments to eligible MSME suppliers were delayed.

While finalising the Income Tax Return for FY 2025-26, businesses should review supplier Udyam registration details, payment terms, invoice dates, outstanding balances and actual payment dates.

A proper MSME ageing analysis and reconciliation of disallowed expenses can help businesses determine the correct taxable income and avoid claiming deductions in the wrong financial year.

Mardia Global | Tax & Accounting Insights for Businesses in India