Section 43B of Income Tax Act: A Detailed Overview
Updated: Aug 28
A component of the Income Tax Act known as Section 43B addresses certain costs that professionals or corporations may deduct from their taxable income. These costs, however, can only be claimed during the year of the actual payment; they cannot be claimed during the year in which the obligation to pay for them arises. In this post, we'll go over the several costs that, according to section 43B of the Income Tax Act, can only be deducted as deductions upon actual payment and not accrual.
Table of content
What is Section 43B of the Income Tax Act?
Certain expenses are listed in Section 43B of the Income Tax Act, 1961, and can only be subtracted from income from business and profession when the assessee actually pays them. These costs include taxes, duties, cessations, fees, interest, payments to Indian Railways, bonuses, commissions, leave encashment, and contributions to employee benefit funds. The deduction is permitted either in the year of payment or before the deadline for submitting the annual income tax return, whichever comes first. Only when calculating income under the PGBP (Profits and gains of business or profession) heading, expenses are taken into account.
Illustration: The accounting year of X Corporation ends on March 31st. The income tax return for the financial year 2023–24 (assessment year 2024–25) must be filed by September 30th, 2024. Assume that X Corporation contributes ₹1,00,000 to its employees' EPF for the 2023–24 fiscal year (April 1, 2023, to March 31, 2024). X Corporation may deduct it from its taxes in the fiscal year 2023–2024 if it pays it by September 30th, 2024. Nevertheless, X Corporation may claim this deduction in the following fiscal year when the payment is made if it is made after September 30th, 2024, rather than for the fiscal year 2023–2024. This example shows how crucial it is to pay certain bills on time in order to be eligible for deductions under Section 43B of the Income Tax Act.
Budget 2024 Update for Section 43B
This amendment is applicable to any amount that the assessee owes to a micro or small business after the deadline set forth in the MSMED Act, 2006, section 15. Only micro and small businesses are covered by this section; medium-sized businesses are not covered by this statute. According to the MSMED Act of 2006, section 15, if a buyer receives products or services from a supplier, the buyer must pay the provider by the agreed-upon date. The longest time frame permitted, if there is a documented agreement, is 45 days from the date of delivery of the goods or services. The maximum term shall be 15 days from the date of delivery if there is no written agreement and the buyer does not disagree.
Deductions under Section 43B of the Income Tax Act
This section outlines the deductions that apply. These include:
Any tax, duty, cesses, or fees paid in accordance with current legislation may be deducted at the time of payment; this includes customs duties, GST, and other levies or cesses. The interest paid on these taxes is also deductible.
Contribution to any recognised employee benefit fund: Before the deadline for depositing those monies or before the deadline for submitting income tax returns, the employer may make a contribution to any recognised employee benefit fund, such as the PF fund, superannuation fund, or gratuity fund.
Employee bonus or commission payable: This sum should represent the actual bonus or commission given to staff members, not dividends due to shareholders.
Interest on loans taken out by State Financial Corporation or Public Financial Institutions in compliance with the terms of those loans.
Interest on advances and loans from Scheduled Bank according to the terms of the loanEmployee leave encashment offered by a business.
Indian Railways payment.
Any amount due to micro and small businesses after the deadline set forth in Section 15 of the MSMED Act.
The conversion of the interests specified in sections 4 and 5 into a loan does not result in the payment of interest, which is deductible. Hence, it is crucial for anyone earning money from a business or profession and keeping mercantile accounts to be aware of the aforementioned regulations, since failing to do so may prevent them from being eligible for these deductions.
Conditions to Claim Section 43B Deductions
The requirements listed below must be met for you to be eligible for the deductions under section 43B of the Income Tax Act:
To be eligible for a deduction under section 43B, a payment must be made for that year—it cannot just be accrued. For instance, suppose an employee's employer declares a bonus, but the employee isn't paid until the next fiscal year. After that, the amount owed cannot be deducted for the first year.
The payment has to be made by the deadline stipulated by the relevant statute, if not before. For instance, the fifteenth of each month is the deadline for ESI donations.
The employer's payment must be required and not discretionary. For instance, the employment contract should include any commission that the company pays to the worker.
Payment must be evidentiary. Any cash payments made by the employer or individual cannot be deducted under section 43B; instead, they must be made in written papers.
Exceptions to Section 43B
Under Section 43B of the Income Tax Act, taxpayers who use an accrual-based accounting system are eligible to claim deductions. However, a few requirements must be completed to maximise these deductions. For example:
If the taxpayer decides to use a system of commercial accounting.
When every expense is paid before or on top of the income tax return filing deadline.
When completing income tax forms, taxpayers are required to furnish sufficient proof of all payments.
It is significant to remember that Section 43B of the Income Tax Act does not apply to the conversion of interest liabilities into share capital. Furthermore, taxpayers should be informed that contributions received on or before the deadline for submitting income tax returns under provision 139(1) of the Act are not covered by this provision.
Conclusion
The Income Tax Act's Section 43B discusses the costs that are deductible from income received from a company or profession. Nevertheless, this deduction can only be taken off of actual costs incurred, not from accumulated charges. You can engage a tax expert to help you with your taxes and the electronic filing of income tax returns if you are an individual with income from a business or profession and wish to maximize your tax savings by claiming as many deductions as possible.
FAQ
Q1. What is section 43B?
The head "Income from business and profession" is connected to Section 43B. It specifies that certain statutory costs, regardless of the year in which they accrued, may only be deducted from business revenue in the year of actual payment.
Q2. Is TDS included in 43B?
The majority of Section 43B is devoted to a list of costs that can only be deducted in the event of actual payment. TDS is a tax that is withheld on behalf of the deductee and put into the government's treasury; it is not an expense. TDS cannot be claimed as an expense because it is not covered by section 43B.
Q3. Can expenditure mentioned under Section 43B can be claimed on an advance payment?
A list of costs that can be claimed upon actual payment is covered by Section 43B. According to section 43B, an advance payment may also be requested.
Q4. Is NPS covered under 43B?
Yes, donations to employee welfare funds—such as the National Pension System (NPS), the Employee State Insurance (ESI) fund, and the Labour Welfare Fund—are deductible under Section 43B.
Q5. What is the most recent modification to Section 43B?
Payments to Micro and Small Businesses registered under the MSME Act are not recognised as a deduction if they are not made on or before the due date specified under section 15 of the MSMED Act, 2006, according to recent revisions made by the Finance Act 2023.
Q6. What is the provision to Section 43B?
As per section 15 of the Micro, Small and Medium Enterprises Development (MSMED) Act 2006, any amount that the assessee owes to a micro or small firm after the stipulated time limit would only be accepted as a deduction upon actual payment.
Q7. Is NPS covered under 43B?
In accordance with Section 43B, donations made to employee welfare funds—such as the National Pension System (NPS), the Employee State Insurance (ESI) fund, and the Labour Welfare Fund—may be excluded.
Q8. What is the timeframe specified for Section 43B?
Only contributions made to Micro and Small Enterprises (MSEs) in accordance with Section 43B that are made within the window of time specified in Section 15 of the MSMED Act 2006 are eligible for deduction under the most recent Finance Bill, 2023. Therefore, in the absence of any other agreements, deductions may be made for payments made within 15 days to MSE merchants.
Q9. How does Section 43B impact deferred payment arrangements with vendors?
Section 43B requires that certain expenses, including payments to vendors, must be paid in the same financial year to claim the deduction. If payment is deferred to the next year, the deduction can only be claimed in the year of actual payment, regardless of when the liability was incurred.
Q10. Can contributions to employee welfare funds be deducted under Section 43B if paid after the due date?
Contributions to employee welfare funds (e.g., provident fund, gratuity) can only be deducted if paid within the due date prescribed by the respective laws. Payments made after the due date will be disallowed in the year they are incurred and can only be deducted in the year they are actually paid.
Q11. Is interest on unpaid loans covered under Section 43B if it's converted into a loan?
Yes, interest on unpaid loans that is converted into a fresh loan is still covered under Section 43B. The deduction for such interest can only be claimed when the actual payment of the converted loan is made, not when the interest is simply converted.
Q12. How does Section 43B apply to taxes paid under protest during litigation?
Taxes paid under protest during ongoing litigation are still eligible for deduction under Section 43B. The section allows deduction on the basis of actual payment, regardless of whether the payment is made under protest or not.
Q13. Does Section 43B apply to foreign companies operating in India?
Yes, Section 43B applies to all companies operating in India, including foreign companies. They must adhere to the same rules for deductions under Section 43B, ensuring that specific expenses are only deducted when they are actually paid, regardless of the company’s origin.
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