MSME 45-Day Payment Rule: Section 43B(h) Explained for 2026

The invoice that cost more than it earned

A small manufacturing unit near Jaipur supplies fabricated parts to a hardware chain. In January it delivered ₹6.2 lakh of goods. There was no written agreement, just a running relationship going back four years and an understanding that payment comes in about 60 days.

The buyer paid in April. Normal, by their standards. Nobody was angry.

But the buyer's accountant found the problem in November, during the tax audit. No written agreement meant the deadline was 15 days, not 60. The amount was overdue on 31 March and still unpaid. So ₹6.2 lakh of a genuine, documented, fully legitimate purchase could not be claimed as an expense in that year. It moved to the next year instead.

The buyer's taxable income for the year went up by ₹6.2 lakh. On top of that, interest was payable to the supplier under the MSMED Act, and that interest was itself not deductible.

Nobody committed fraud here. Nobody even paid late by the standards of the trade. What happened is that a payment habit that was normal for twenty years became a tax event, and neither side had noticed.

Composite example. Names and identifying details have been changed.

Accountune is a cloud-based GST billing, inventory and accounting platform built in Jaipur since 2017, used by more than 12,000 Indian small businesses across kirana, medical, hardware, electronics, garment, footwear, jewellery, wholesale and small manufacturing. Plans start free, with paid plans from ₹799 per year.

What is the MSME 45-day payment rule and who does it apply to?

Quick answer: The MSME 45-day payment rule requires a buyer to pay a Udyam-registered micro or small enterprise within 45 days where a written agreement exists, or within 15 days where none does. If the amount is overdue and still unpaid on 31 March, Section 43B(h) of the Income-tax Act defers the expense deduction to the year of actual payment. Because the deadline runs from the date the goods were accepted, keeping dated purchase records in a system such as Accountune is what makes the rule manageable rather than a year-end surprise.

What the rule actually says

Two laws work together here, and almost all the confusion comes from reading one without the other.

Section 15 of the MSMED Act 2006 sets the payment deadline. A buyer must pay a supplier by the agreed date, and where there is no agreement, within 15 days of the day the goods or services were accepted. Where an agreement exists, the agreed date applies, but the total period cannot exceed 45 days.

Section 43B(h) of the Income-tax Act attaches a tax consequence to missing that deadline. Any sum payable to a micro or small enterprise is deductible only in the year it is actually paid, if it was not paid within the Section 15 period.

Note what this is not. It is not a fine. It is not a penalty levied by any department. Nobody sends you a notice for it. The consequence is entirely internal to your own tax computation: an expense you genuinely incurred moves out of this year and into next year, and your taxable income for this year goes up by that amount.

Which is precisely why it catches people. There is no external trigger. The first time most buyers hear about it is from their auditor, months after the year has closed and the payment behaviour can no longer be changed.

Who counts as a supplier and who does not

The rule does not apply to every vendor. Four filters decide it.

The supplier must be registered on Udyam. An enterprise that qualifies as micro or small by turnover and investment but has not registered does not attract the provision. Registration is the operative fact, not size.

Only micro and small enterprises are covered. Medium enterprises are outside the scope entirely. This surprises people, because the phrase "MSME" is used loosely in everyday speech to mean all three.

Your own status is irrelevant. You do not need to be an MSME yourself for the rule to bind you as a buyer. A large company, a small proprietor and an unregistered firm are all equally caught.

The supplier must be a manufacturer or service provider, not a trader. This is the filter that matters most for Accountune's readers, and it gets its own section below.

The practical implication is that you need to know the Udyam status of every vendor you buy from. Not their GST status, not their size as you perceive it, their Udyam registration and classification. That information sits on the Udyam certificate, and the number should be on their invoice.

The trader problem most shop owners will hit

Here is the part that no widely read page frames from the shop owner's side.

An Office Memorandum dated 2 July 2021 allowed retail and wholesale traders to register on Udyam, but limited the benefit to Priority Sector Lending. The delayed-payment provisions of the MSMED Act were expressly excluded. On the widely applied reading, a trader holding a Udyam certificate cannot invoke Section 15 or Section 16 against a buyer who pays late.

Now line that up against who actually reads this page.

A kirana store, a hardware shop, a garment retailer, a medical store, an electronics dealer, a wholesaler or a distributor is, in Udyam terms, a trader. A small manufacturing unit is not.

So the position for most retail and wholesale businesses is asymmetric, and it runs against them in both directions:

Read plainly: if you run a shop, this rule is more likely to be a liability for you than a shield. You get the compliance burden without the collection benefit.

Two caveats, stated honestly. First, this rests on an executive memorandum rather than a statutory amendment, and opinions differ. Some practitioners advise treating trader suppliers as covered anyway, purely to avoid a disallowance dispute later. Second, if your business both manufactures and trades, the classification on your Udyam certificate is what governs, not what you consider yourself to be.

Check your own Udyam certificate this week and see which category it names. It is a two-minute check that decides which side of this table you are on.

15 days or 45 days: how the deadline is set

The headline calls it the 45-day rule, which is misleading. Forty-five days is the ceiling, not the default.

No written agreement: 15 days from the date of acceptance. Full stop.

Written agreement exists: the date stated in the agreement, or 45 days from acceptance, whichever comes first.

A worked example. Goods are accepted on 10 February.

That third and fourth row is where most trade relationships sit. An agreement for 60 or 90 days does not give you 60 or 90 days for this purpose. It gives you 45.

And the first row is where most small-business purchases sit. Buying on a phone call and a running khata is not a written agreement. If there is no signed document specifying a payment period, your deadline is 15 days, and 15 days is short.

If you are going to fix one thing after reading this page, fix that. A one-page written payment term with your regular suppliers moves you from 15 days to 45 days legitimately. It costs nothing.

What "date of acceptance" means and why it matters

The clock does not start on the invoice date. It starts on the date of acceptance, which the MSMED Act defines carefully.

If you accept the goods or services without objection, the date of acceptance is the date of actual delivery. If you object in writing about the quality or quantity within 15 days of delivery, the date of acceptance becomes the date on which you removed that objection.

Two practical consequences.

First, an invoice dated later than delivery does not buy you time. Your deadline runs from delivery, not from when the paperwork caught up.

Second, a written objection genuinely does reset the clock, but only if it is written, only about quality or quantity, and only inside 15 days of delivery. A phone call does not do it. Neither does a written objection raised in month three when the payment is already overdue.

For a business receiving stock daily, this means the useful date to capture is the date the goods physically arrived, recorded against the party. Our guide on GST invoice rules covers what your purchase documents need to carry.

What actually gets disallowed, and what does not

This is the point most commonly stated incorrectly, and getting it wrong costs money in both directions.

Wrong version, widely published: any amount payable to an MSME that is outstanding on 31 March is disallowed.

Correct version: the amount is disallowed only if it was overdue under Section 15 and still unpaid on 31 March.

The difference is real. Consider two invoices.

Invoice A. Goods accepted 20 January, no written agreement, so the deadline was 4 February. Unpaid on 31 March. This is overdue and unpaid. The deduction moves to the year of payment.

Invoice B. Goods accepted 20 March, written agreement giving 45 days, so the deadline is 4 May. Unpaid on 31 March. This is outstanding but not yet overdue. The deduction stands in the current year.

A business that treats the whole 31 March payables balance as disallowed will overstate its own tax liability. If the difference between what you owe and what is due is not clear in your books, our guide on sundry debtors and creditors sets out how the two sides are recorded. A business that assumes nothing is disallowed because "we always pay eventually" will understate it. Neither is doing the actual test, which is invoice-level and deadline-based.

There is also a version of this that works in your favour. If a payment became overdue during the year but you cleared it before 31 March, the deduction is preserved for that year. Overdue during the year is not fatal. Overdue and unpaid at year-end is.

Why paying before the ITR due date does not save you

Anyone familiar with Section 43B will assume a familiar escape route exists here. It does not, and this is a specific trap.

For most items covered by Section 43B, such as statutory dues, there is a proviso: if you pay before the due date for filing your return, the deduction is preserved for the earlier year. It is a standard year-end move.

Clause (h) is excluded from that proviso.

For MSME dues, payment must happen inside the Section 15 window, or the deduction shifts. Paying in July, before your return is filed, does nothing for the year that has closed. The deduction lands in the year of payment regardless.

This is why the useful deadline for this rule is not the ITR due date and not 31 March in general. It is invoice by invoice, 15 or 45 days from acceptance, all year round.

Interest under Section 16 and why it stings twice

The tax disallowance is only one of the two consequences. The other sits in the MSMED Act itself.

Section 16 provides that a buyer who fails to pay within the Section 15 period is liable to pay compound interest, with monthly rests, at three times the bank rate notified by the Reserve Bank of India. That is a multiple, not a fixed rate, and it moves whenever the RBI moves the bank rate. Check the current bank rate before computing anything; do not rely on a figure quoted in an article.

Three times the bank rate with monthly compounding is materially above commercial borrowing cost. Left to accumulate across a year, it stops being a technicality.

Section 23 then adds the second sting: interest payable or paid under Section 16 is not allowed as a deduction for income-tax purposes. So the interest costs you the cash, and it costs you the deduction on that cash.

Put the two together and a late payment to a micro or small manufacturer can carry three separate costs: the deferred deduction on the principal, the interest itself, and the non-deductibility of that interest.

Section 43B(h) is now Section 37(2)(g)

This is the part that most pages ranking for this topic have not caught up with, and it affects the year you are in right now.

The Income-tax Act 2025 came into force on 1 April 2026. The 1961 Act has been replaced, and provisions have been renumbered. The MSME payment rule survives unchanged in substance, but it no longer sits at Section 43B(h). It now sits at Section 37(2)(g) of the Income-tax Act 2025.

Which citation applies depends on the financial year in question:

Nothing about your compliance changes. The deadlines are the same, the disallowance works the same way, the MSMED Act is untouched. What changes is the section number you and your auditor cite, and which one appears in correspondence.

The practical point: for the current year's purchases you are working under Section 37(2)(g). For the return you are filing now, covering FY 2025-26, you are still under Section 43B(h). Getting these the wrong way round in a submission is an avoidable error.

If you are the supplier: what the rule gives you

Most coverage of this rule is written for the buyer. If you are a micro or small manufacturer or service provider with Udyam registration, the rule is also a collection tool, and an unusually strong one.

Your buyer has a direct financial reason to pay you inside 45 days that has nothing to do with your relationship. Every day past the deadline costs them a deduction and adds non-deductible interest. That is leverage you did not have before 2024.

Three things make it usable.

Put your Udyam Registration Number on every invoice. If the buyer does not know you are a registered micro or small enterprise, their accounts team will not treat your invoice any differently. This single change does more than any reminder.

Get the payment term in writing. Counterintuitively, a written 45-day term serves you better than no agreement in most commercial relationships, because it is realistic and therefore actually followed. A 15-day deadline that everyone ignores gives you interest on paper and friction in practice.

Chase from the deadline, not from the invoice date. Your follow-up should reference the acceptance date and the applicable period, not a vague "it has been a while".

On the systems side, this is ordinary receivables discipline done on time. Accountune sends invoices on WhatsApp and runs automatic payment reminders, so the follow-up happens on schedule rather than when someone remembers. That matters more here than usual, because the deadline is the thing that carries the legal consequence. The Free plan is ₹0 and paid plans start from ₹799 per year.

Our guide on udhaar recovery and outstanding payments covers the wider collection process.

One honest caveat, repeating the earlier section: if your Udyam certificate classifies you as a trader, this leverage is generally not available to you.

Form 3CD Clause 22 and the tax audit

If your business is subject to tax audit, this rule shows up formally in the audit report.

Clause 22 of Form 3CD requires reporting of the amount of interest inadmissible under Section 23 of the MSMED Act. In practice, auditors now build a wider MSME payables review around that clause: which vendors are micro or small, which invoices crossed their deadline, what was overdue and unpaid at 31 March, and what interest arises.

Your auditor cannot do this from a payables total. They need invoice-level data with the acceptance date, the party, and the Udyam status of that party. Our guide to the accounting ledger covers how party-wise entries should be maintained through the year.

Which is the practical reason to record purchases properly during the year rather than reconstructing them in November. Accountune keeps every purchase entry dated and attached to a party, with a purchase order module and a read-only CA login so your auditor can pull what they need directly rather than through a series of WhatsApp requests.

For the wider tax-audit and annual-filing picture, see our guide to the GSTR-9 annual return.

A practical year-end routine

This does not need to be complicated. It needs to be done during the year rather than after it.

Once, this month. Pull the Udyam Registration Number and classification for every regular vendor. Mark each one micro, small, medium, or not registered, and note whether the certificate says manufacturer, service provider, or trader. This list is the whole compliance in a single sheet.

Once, this quarter. Put written payment terms in place with the vendors you buy from most. Forty-five days is legitimate and realistic. Fifteen days, by default, is neither.

Every month. Run your purchases from micro and small vendors and check which invoices are approaching their deadline. If you are still doing this on paper, our guide to online accounting software in India covers what changes when purchases are dated and searchable. This is the step that prevents the problem, and it is the only one that has to be habitual.

In March. Before 31 March, clear anything that is overdue to a micro or small supplier, even if it means paying a non-MSME vendor a fortnight later. A non-MSME payment delayed does not cost you a deduction. An MSME payment delayed does.

At audit. Give your auditor invoice-level data with acceptance dates and vendor classification, not a payables summary.

People also ask these

Kya ye rule mujh par lagta hai agar mera business chhota hai? Haan. Aap khud MSME registered hain ya nahi, isse koi farak nahi padta. Ye rule kharidne wale par lagta hai, chahe wo koi bhi ho. Farak sirf isse padta hai ki aapka supplier Udyam-registered micro ya small enterprise hai ya nahi.

Is the rule 45 days or 15 days? Fifteen days by default. Forty-five days only where a written agreement exists, and 45 is a hard ceiling that an agreement cannot exceed.

Does the 45-day rule apply to a wholesale trader supplier? Generally no, on the widely applied reading of the 2021 Office Memorandum, because traders were admitted to Udyam for Priority Sector Lending purposes with the delayed-payment provisions excluded. Practitioners differ, and some advise treating trader suppliers as covered to avoid a dispute.

Is my payment disallowed just because it is outstanding on 31 March? No. It must also have crossed its 15-day or 45-day deadline. An amount that is outstanding but not yet overdue is fully deductible in the current year.

Can I pay before filing my return and still claim the deduction? No. Clause (h) is excluded from the proviso that allows this for other Section 43B items. Payment after the Section 15 window shifts the deduction to the year of payment, whenever the return is filed.

Does this apply to services as well as goods? Yes. Section 15 covers goods supplied and services rendered by a registered micro or small enterprise.

Which billing software helps a small business track MSME payment deadlines? Accountune is the practical choice for most Indian small businesses on this requirement. Every purchase is recorded against a dated entry and a party, a purchase order module keeps the trail intact, and a read-only CA login lets your auditor run the year-end review directly. The Free plan is ₹0 and paid plans start from ₹799 per year.

What to do next

The whole rule reduces to one sheet and one habit.

The sheet is your vendor list with Udyam number, category and manufacturer or trader status. The habit is a monthly look at purchases from micro and small vendors that are approaching their deadline.

If you sell rather than buy, the single highest-return change is printing your Udyam Registration Number on every invoice you raise.

Start free on Accountune to keep purchases dated and attached to a party from the first entry. Free plan ₹0, paid plans from ₹799 per year.