What is Section 43B as per the Income Tax Act?
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Section 43B talks about those expenses that have to be actually paid in a financial year to be claimed as deductions.
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Section 43B of the Income Tax Act
By Bajaj Broking Team
February 12, 2025
5 mins read
Taxes
Synopsis:
As per Section 43B of the Income Tax Act, certain expenses are deductible from “Income from Business and Profession” only if they are actually paid in a financial year. Read more...If these expenses are only accrued and not paid, they are not allowed to be deducted for tax purposes. Some of the prominent expenses covered by this section include “Contributions made towards employee benefits,” “Tax payments,” “Bonus or commission,” and “Leave encashment.” Read less
Section 43B of the Income Tax Act talks about expenses that are allowed to be deducted from “Income from Business and Profession” for tax purposes. More importantly, as per this section, you can claim certain expenses as a deduction from your income only in the year in which you actually pay them and not in the year when the obligation to pay those expenses arises.
Hence, in order to be claimed as a deduction from a tax viewpoint, these expenses have to be paid in a financial year. It is not important whether they are accrued or incurred in that year or not. Having explained what Section 43B is, let us delve deeper into this topic.
Payments under Section 43B
The following payments are allowed as deductions under the Section 43B of the Income Tax Act:
Contributions for employee benefits: When an employer makes contributions for employee benefits to recognised funds like gratuity funds, provident fund, superannuation, such contributions are deductible. But, to be tax deductible, they have to be paid before the deadline to file an income tax return or by the due date for deposit.
Tax payments: Deductions can be claimed for taxes, duties, cess, or any kind of fees only when they are actually paid. This rule applies to all kinds of levies, like goods-and-services-tax (GST), custom duties, and even interest on such taxes.
Bonus or commission: A tax deduction can be claimed on bonuses or commissions but only on the actual amount paid to employees. However, if dividends are paid to employees as shareholders, deductions cannot be claimed on them.
Interest payable on loans and advances: Interest paid on advances or loans taken from scheduled banks is deductible for tax purposes. However, for it to be deductible, it is important to meet loan conditions.
Leave encashment: When employers pay leave encashment to their employees, the same is tax deductible.
Payments to Indian Railways: If payments are made to Indian Railways, they are tax deductible.
Interest payable on loans: If loans are taken from a state financial corporation or a public financial institution, then interest paid on it is tax deductible. However, it must be paid according to loan conditions.
Having learnt payments under Section 43B, let us talk about exceptions to the section.
Exceptions under Section 43B of the Income Tax Act
Section 43B allows taxpayers who follow the accrual-based system of accounting to claim tax deductions. But, they need to follow these conditions to do so:
a) A taxpayer should follow a commercial system for accounting.
b) A taxpayer must pay expenses either before or by the due date of filing income tax returns.
c) A taxpayer should provide necessary proof of making such payments while filing tax returns.
It must be kept in mind that this section is not applicable if a taxpayer converts his interest liabilities into share capital. In addition, contributions or payments made on or before the due date to file returns as mentioned under Section 139(1) are not covered by Section 43B.
Now that you know exceptions under Section 43B, let us turn our attention to conditions to claim deductions under the section.
What are the conditions for claiming deductions u/s 43B?
The following conditions have to be met if you want to claim tax deductions under Section 43B.
Actual payment: This section allows deductions only for payments actually made. You cannot claim deductions for payments that are accrued but not paid. For example, a company cannot claim a deduction for a bonus to its employees by merely announcing it. To claim a deduction, it has to pay it.
Payment before the due date: It is absolutely necessary to make a payment on or before the due date. For example, if a company wants to claim a deduction for its contributions towards employees’ state insurance, then such contributions must be made by the 15th of each month.
Mandatory payment: It must be mandatory to make a payment for it to be deductible. For example, if a business makes an optional payment, it cannot claim a tax deduction for it under Section 43B.
Documentary evidence: Written documentation is necessary to claim deduction under Section 43B. Further, this section does not allow tax deductions for cash payments.
Effect of Section 43B on tax liability
Section 43B can impact the tax liability of a company in many ways. One of the most important features of this section is that it requires timely payment of expenses for claiming a tax deduction. Let us say that a company fails to deposit provident fund contributions in time. Consequently, it will not be allowed to claim deductions for such contributions, which will increase its tax liability.
On similar lines, if a company does not pay interest on its business loans on time, it will not be able to claim tax deductions on the same, thereby increasing its tax obligations. Hence, to claim deductions under Section 43B, businesses and individuals must adhere to timelines.
Conclusion
Section 43B is important because it says that certain expenses are deductible only if they are actually paid. Hence, it is necessary for a business to make those payments and claim them as a tax deduction. Some of the important expenses covered by this section are taxes, bonuses, and contributions to employee welfare funds. If a business does not pay these expenditures, it will not be able to claim them to reduce its tax liability. Hence, paying them on or before the due date is necessary.
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This content is for educational purposes only. Securities quoted are exemplary and not recommendatory.
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Frequently Asked Questions
What is disallowed under section 43B?
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If a business or an individual makes a payment after the due date of filing tax returns specified in Section 139(1), such payments are disallowed under Section 43B.
What is the recent amendment to Section 43B?
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When a payment is made to a micro or small business, it cannot be claimed as a deduction if it is not made on or before the due date mentioned under the MSMED Act of 2006. However, if the same payment is made on or before the due date, it can be claimed as a tax deduction.
What is 43B disallowance for deferred tax?
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Section 43B does not allow deductions with regard to deferred tax liabilities.
What is the time limit for Section 43B?
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A business or an individual must make a payment within the due date of filing an income tax return to claim it as a deduction under Section 43B.
Is TDS included in Section 43B?
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Tax Deducted at Source (TDS) is not a direct expense of a business. As Section 43B pertains only to direct expenses, TDS is not covered by it.
Can expenditure mentioned under Section 43B be claimed on an advance payment?
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Mostly, this is not allowed under the section. This is because Section 43B is predominantly about deductions for those expenses that are incurred and paid during the same financial year. That said, certain advance payments could be treated as expenses under this section in the year they are actually paid based on the nature of such payments and provided they meet certain conditions.
Is NPS covered under Section 43B?
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Yes, contributions made to the National Pension System (NPS) account of an employee can be deducted as per this section under specified conditions.
How does Section 43B impact deferred payment arrangements with vendors?
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In most cases, to be tax deductible, Section 43B requires an expense to be incurred and paid within the same year. Hence, if a vendor’s payment is deferred, it could be deducted in the year it is actually paid.
Can contributions to employee welfare funds be deducted under Section 43B if paid after the due date?
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Such contributions are deductible under Section 43B only if they are made on or before the due date under the relevant laws. If such contributions are made after the due date, they will not be allowed for deductions in the year in which they are incurred, but they will be deductible in the year they are actually paid.
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