Section 43B(h) — 45-Day Payment Rule for MSME Suppliers 2026: Complete Guide
If you are an MSME supplier and your buyers consistently delay payment — “next month,” “accounts will approve,” “15 more days” — Section 43B(h) has fundamentally changed your legal position. Under this provision (effective FY 2023-24), if a buyer delays payment to a Udyam-registered MSME supplier beyond 45 days, the buyer cannot deduct that expense in their income tax return for that year. They pay more tax because they paid you late.
This is not a token provision. At a 30% tax slab: a buyer who delays ₹20 lakh in MSME payments faces ₹6.24 lakh in additional tax liability for that year — on payments they still owe. The incentive to pay on time has never been stronger. This guide explains the rule completely — who it covers, how 45 days are counted, interest calculation, what buyers actually face, and how MSME suppliers can use this protection practically.
What Section 43B(h) Does — The Simple Explanation
Income Tax Act Section 43B lists expenses that are deductible only on actual payment — not on accrual basis. Section 43B(h), added by Finance Act 2023, extends this to MSME supplier payments: if a buyer purchases from a Udyam-registered MSME and does not pay within the required timeline, the expense is disallowed in the current year’s ITR — deductible only in the year actual payment is made.
| Payment Timeline | Buyer’s Tax Treatment | MSME Supplier’s Position |
|---|---|---|
| Payment within 45 days of acceptance | Full expense deductible — no issue | Payment on time ✅ |
| Payment after 45 days, same FY | Expense deductible only in payment year — current year tax higher | Can claim interest under MSMED Act |
| Payment after FY ends — next FY | Expense disallowed this year — full tax impact. Deductible next year when paid. | Strong legal position — interest + MSME Samadhaan |
| No written agreement, MSME-registered supplier | Default limit is 15 days — not 45 | Can demand payment within 15 days |
Buyer purchases ₹20 lakh from Udyam-registered MSME. Payment made 75 days later (30 days overdue).
₹20 lakh expense disallowed in current year ITR — added back to taxable income.
Extra tax at 30% slab + 4% cess: ₹20L × 31.2% = ₹6,24,000 additional tax this year.
When payment is made next year — the deduction is restored. But this year’s extra tax is paid and cannot be recovered.
How the 45 Days Are Counted
The most common confusion: 45 days from invoice date or acceptance date? The MSMED Act is clear — from the date of actual delivery/acceptance, not from the invoice date. These can differ.
| Day | Event | What It Means |
|---|---|---|
| Day 0 | Goods delivered / Services completed and accepted | The 45-day countdown starts here — not from invoice date |
| Day 1–15 | Default payment period (no written agreement) | Without any written agreement — MSMED Act requires payment within 15 days only. MSME can demand payment at Day 16. |
| Day 1–45 | Period if written agreement exists | Maximum 45 days allowed in any written agreement. Any agreement specifying more than 45 days is legally invalid for MSME suppliers. |
| Day 46+ | Violation zone | Section 43B(h) triggered — buyer’s expense disallowed. MSMED Act interest starts from Day 16 (without agreement) or Day 46 (with agreement). |
Who Is Covered — MSME Classification 2026
Section 43B(h) applies only when the supplier is Udyam-registered. Simply being a small business is insufficient — formal Udyam Registration at udyamregistration.gov.in is mandatory.
| Category | Investment Limit | Turnover Limit | 43B(h) Coverage |
|---|---|---|---|
| Micro Enterprise | Up to ₹1 crore | Up to ₹5 crore | ✅ Full coverage |
| Small Enterprise | Up to ₹10 crore | Up to ₹50 crore | ✅ Full coverage |
| Medium Enterprise | Up to ₹50 crore | Up to ₹250 crore | ✅ Full coverage |
| Unregistered small business | Any size | Any turnover | ❌ No coverage — must register |
Interest Calculation — What MSME Suppliers Can Claim
Section 43B(h) addresses the buyer’s tax treatment. Separately, under the MSMED Act 2006, MSME suppliers are entitled to compound interest on delayed payments — at three times the RBI bank rate, compounded monthly. At current rates, this is approximately 18% per annum, compounded monthly.
Interest Calculation Example:
Invoice amount: ₹15,00,000
Acceptance date: March 1, 2026
Payment due (45-day agreement): April 15, 2026
Actual payment: June 29, 2026 (75 days late)
Interest rate: ~18% per annum, compounded monthly
Simple interest approximation: ₹15L × 18% × (75/365) = ₹55,479
Compounded monthly (actual MSMED Act calculation): slightly higher — approximately ₹56,800
Total claim: ₹15,56,800 (principal + interest)
The buyer also faced ₹15L expense disallowance in their ITR — additional tax cost at 30% slab: ₹4,68,000.
Two Real Case Studies
✅ Case 1 — MSME Supplier Used the Rule Effectively
Situation: Udyam-registered manufacturing MSME supplied ₹15 lakh material to a large distributor. Invoice issued March 10, goods accepted same day. Payment due by April 24 (45 days). Buyer paid May 9 — 15 days late.
Action taken: MSME supplier sent a formal letter to the buyer referencing Section 43B(h) and MSMED Act, with an interest calculation statement for the 15-day delay (₹11,096 interest).
Buyer’s response: Once the buyer’s CA confirmed that the ₹15 lakh expense would be disallowed in the current year’s ITR if not paid within 45 days — and saw that it was already past 45 days — they processed the interest payment the same week. The buyer’s CA also updated their payment tracking to flag all MSME supplier invoices at the 40-day mark going forward.
Result: ₹11,096 interest received. Future payments from this buyer consistently within 40 days.
❌ Case 2 — No Registration, No Protection
Situation: Small trader — genuinely small business — supplied ₹8 lakh material to a large company. Payment came 90 days later. Trader referenced Section 43B(h) in a letter demanding payment and interest.
Problem: No Udyam Registration. Without it — Section 43B(h) does not apply. The buyer’s expense is not disallowed regardless of when payment is made. MSMED Act interest provisions also do not apply without registration.
Result: Buyer’s legal team responded that the trader was not MSME-registered and therefore Section 43B(h) did not apply. No interest paid. Trader subsequently registered on Udyam — but protection only applies to future transactions, not the ₹8 lakh already delayed.
Lesson: Registration is free and takes 15 minutes. Waiting costs this trader ₹8 lakh in unprotected exposure. Every unregistered invoice is an invoice without legal protection.
Buyer’s Perspective — Tax Impact Table
| Scenario | Buyer’s Tax Position | When Deductible? |
|---|---|---|
| ₹20L MSME purchase — paid within 30 days | Full deduction in FY 2025-26 — no issue | FY 2025-26 |
| ₹20L MSME purchase — paid in 60 days (same FY) | ₹20L disallowed FY 2025-26. Extra tax: ₹6.24L (30% slab) | FY 2026-27 when paid |
| ₹20L MSME purchase — payment next FY | ₹20L fully disallowed FY 2025-26. Extra tax: ₹6.24L paid now. | FY 2026-27 when paid |
| ₹20L from non-MSME supplier — late payment | Section 43B(h) not applicable — normal accrual deduction | FY 2025-26 (accrual basis) |
The tax impact is identical whether payment is 1 day late or 90 days late — the entire expense is disallowed in the current year if the 45-day limit is missed. This is why sophisticated buyers now set internal payment alerts at Day 40 for MSME supplier invoices — five days of buffer before the limit is breached.
Action Plan for MSME Suppliers — Five Steps
-
1Complete Udyam Registration Today
udyamregistration.gov.in — free, Aadhaar-based, 15 minutes. Download the certificate. Share it with all buyers. Without this — zero legal protection regardless of business size or delay duration. -
2Add Payment Terms to Every Invoice
Every invoice should state: “Payment due within 45 days as per Section 43B(h) of the Income Tax Act and MSMED Act 2006. We are a Udyam-registered MSME — Udyam Reg. No: [your number].” This puts the buyer on explicit notice — removing any “I didn’t know” defence. -
3Get Written Agreements with Regular Buyers
For regular buyers — a simple purchase agreement specifying “payment within 45 days of delivery acceptance” is legally binding. Without a written agreement, the default limit under MSMED Act is 15 days — which is actually more favourable to the supplier. -
4Track Acceptance Dates — Not Invoice Dates
The 45-day countdown starts from goods acceptance or service completion — not from invoice date. Maintain a simple tracking sheet: invoice date, acceptance date, due date (acceptance + 45), days outstanding. Automated reminder at Day 35 and Day 43. -
5Formally Claim Interest on Late Payments
Send a written notice to the buyer with interest calculation when payment is overdue. Reference Section 43B(h) and MSMED Act. If buyer does not respond — file at MSME Samadhaan portal (msmesamadhaan.gov.in) for free dispute resolution. MSME Facilitation Council (MSEFC) mediates — faster than civil court.
Seven Common Mistakes MSME Suppliers Make
- ❌ No Udyam Registration: Zero legal protection without it. The most avoidable and most expensive mistake — costs nothing to fix.
- ❌ Not stating payment terms on invoices: Buyer claims they “did not know” the 45-day limit applied. Put it on every invoice — remove ambiguity.
- ❌ Waiting 45 days when there is no written agreement: Without a written agreement, MSMED Act default is 15 days. Many suppliers unnecessarily give buyers an extra 30 days they are not entitled to.
- ❌ Not claiming interest on late payments: It is a legal right — not a favour. Most MSMEs do not claim it because they fear relationship damage. A politely worded interest statement is professional, not confrontational.
- ❌ Not knowing MSME Samadhaan portal exists: Free government dispute resolution. Most MSME suppliers have never used it — or never heard of it. It is faster than civil court and completely online.
- ❌ Not informing buyers about their Udyam status: Buyer does not know supplier is MSME-registered, does not apply the 45-day discipline, delays continue. Share your Udyam Certificate once — proactively — with every buyer.
- ❌ Tracking invoice dates instead of acceptance dates: The 45-day rule runs from acceptance, not from invoice. If invoice is raised 5 days before delivery — actual due date is 50 days after invoice. Tracking invoice dates leads to incorrect due date calculation.
Frequently Asked Questions
Q1. Does this rule apply to service providers or only manufacturers?
Both goods and services are covered. Section 43B(h) and the MSMED Act apply to any Udyam-registered enterprise — manufacturing or service. IT service providers, consultants, transporters, designers, contractors — if Udyam-registered and providing services to buyers who file income tax returns, the 45-day rule applies in full.
Q2. Does Section 43B(h) apply when the buyer is an individual consumer?
Section 43B(h) is an income tax provision — it applies only to buyers who declare business or professional income in their ITR. Individual consumers making personal purchases are not affected by the income tax disallowance provision. However, the MSMED Act’s interest claim provision applies to all buyers — including individuals — regardless of their tax filing status.
Q3. Buyer paid after 45 days and paid the interest too — do they still get the deduction?
Yes — the deduction is not permanently lost, only deferred. When actual payment is made (even in the next financial year), the expense becomes deductible in that year’s ITR. If payment was delayed to FY 2026-27 — the ₹20 lakh expense is deductible in FY 2026-27’s ITR. The interest paid is also separately deductible as a business expense. The penalty is cash flow — paying tax a year earlier than necessary.
Q4. What is MSME Samadhaan and how do I file a complaint?
MSME Samadhaan (msmesamadhaan.gov.in) is the government’s dedicated online portal for MSME payment dispute resolution. File a complaint if buyer is non-responsive to written demands. The complaint goes to the MSME Facilitation Council (MSEFC) in your state. They first attempt conciliation — if that fails, it moves to arbitration. The entire process is online, free of cost, and significantly faster than civil court. Most disputes are resolved at the conciliation stage once the buyer understands the legal exposure.
Q5. Can buyer and MSME supplier agree to 60 or 90-day payment terms in a written contract?
No — any agreement specifying more than 45 days is legally invalid under the MSMED Act if the supplier is MSME-registered. The parties cannot contract out of the MSMED Act protection. A written agreement specifying 90-day payment terms will be treated as if the 45-day limit applies — the buyer gets no benefit from the extended terms in the contract. Maximum agreed payment period is 45 days.
Q6. Registered after some invoices were issued — does the rule apply to old invoices?
No — Section 43B(h) protection applies only to transactions where the supplier was Udyam-registered at the time of the transaction. Old invoices issued before the registration date are not covered. The buyer’s CA will check the Udyam registration date against invoice dates. Register as early as possible — every invoice issued after registration is protected.
Q7. Worried that formally claiming interest will damage the buyer relationship?
This is a legitimate practical concern. The approach: first, a friendly payment reminder at Day 40 (before the limit). If overdue — a polite but formal notice referencing Section 43B(h) with an interest calculation attached. In most cases, when buyers see the specific tax consequence documented in rupees, payment is regularised without escalation. The relationship is typically strengthened, not damaged — buyers who were taking advantage of delays now have a structured framework. The few buyers who react negatively to a legitimate legal notice were unlikely to be sustainable long-term customers anyway.
Conclusion
Section 43B(h) is the most significant change in MSME payment dynamics since the MSMED Act itself. For the first time, delayed MSME payments have a direct, quantifiable, immediate tax consequence for the buyer — in the same year the delay occurs. This is not a distant legal threat — it shows up in the buyer’s CA’s calculations when preparing the March-end ITR.
The protection is automatic for Udyam-registered MSMEs — but only for those who have registered. The trader from Case 2 who lost ₹8 lakh in unprotected exposure needed 15 minutes and zero rupees to be in the same position as Case 1. Register. Put your Udyam number on every invoice. Track acceptance dates. Claim interest in writing. Use MSME Samadhaan when needed.
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