In the realm of income tax compliance, Section 43B plays a critical role in ensuring transparency and discipline in claiming deductions. Introduced to curb tax avoidance through fictitious liabilities, Section 43B mandates that certain expenditures can be claimed as deductions only when actually paid, irrespective of the method of accounting followed by the taxpayer.
This provision primarily affects businesses and professionals who follow the mercantile (accrual) system of accounting, and it aligns tax deductions with real cash flow rather than notional entries.
Legal Provision under Section 43B
According to Section 43B of the Income Tax Act, 1961:
“Certain deductions are allowed only on actual payment, irrespective of the liability being incurred in the books of accounts.”
In simple terms, even if an expense is due and shown as payable in the books, the deduction for such expense will be allowed only in the year of payment, not when the liability is recorded.
When Can You Claim the Deduction?
There are two conditions:
- Paid in the same financial year → Deduction allowed in the same year
- Paid after the year ends but before the due date of ITR filing (Section 139(1)) → Deduction still allowed in the earlier year
- Paid after the due date of ITR filing → Deduction allowed in the next year
Example:
You have to pay PF of ₹20,000 for March 2025.
You paid it on July 25, 2025. The ITR due date is September 15, 2025.
✅ You paid before the due date → Deduction allowed in FY 2024–25 (AY 2025–26)
But if you paid it after September 15 → Deduction will be allowed in next year (FY 2025–26)
Who is Affected?
This rule applies to all businesses and professionals who follow the accrual accounting system. Not applicable if you follow cash accounting, because you record expenses only when you pay.
Types of Expenses Covered under Section 43B
Below are the common payments that are covered under this section:
| 💼 Type of Payment | 📆 When Deduction is Allowed |
| GST, Excise Duty, VAT, Custom Duty, Cess | On actual payment |
| Employer’s contribution to PF, ESI, Superannuation | On actual payment |
| Bonus or commission to employees | On payment only |
| Interest on loan from public financial institution or state finance corporation | On actual payment |
| Interest on loan from a scheduled bank | On actual payment |
| Leave encashment payable to employees | On actual payment |
| Payment to Indian Railways for services | On actual payment |
When is the Deduction Allowed?
| Scenario | Year of Deduction |
| Expense incurred and paid during the year | Same financial year |
| Expense incurred in FY but paid before ITR due date (e.g. 15 Sept for non-audit cases) | Same financial year |
| Expense incurred in FY but paid after ITR due date | Next financial year |