MSME 45-Day Payment Rule 43B(h): Rules and Examples

The MSME 45-day payment rule links your income-tax deduction for purchases to how quickly you pay micro and small suppliers. Introduced by the Finance Act 2023 as section 43B(h) of the Income-tax Act, 1961, and applicable from FY 2023-24, it says that an amount owed to a micro or small enterprise is deductible only in the year it is actually paid, if it is not paid within the time limit in the MSMED Act: 15 days without a written agreement, or up to 45 days with one. The Income-tax Act, 2025, effective from 1 April 2026, carries the concept forward under new section numbering. For buyers, late payment now means paying more tax this year. This guide explains who is covered, how the dates work, the tax effect with examples and a process to stay on the right side.

The rule in plain terms

You buy goods or services from a supplier registered as a micro or small enterprise under Udyam.
The MSMED Act requires payment within the agreed period, which cannot exceed 45 days from the day of acceptance or deemed acceptance. If there is no written agreement, the limit is 15 days.
If you pay within the limit, the expense is deductible in the normal way.
If you pay late, the expense is deductible only in the year of actual payment. Unlike other items covered by the same section, there is no relief for paying before the income-tax return due date.

Who is covered

Supplier	Covered by the rule?
Micro enterprise (manufacturing or services) registered on Udyam	Yes
Small enterprise (manufacturing or services) registered on Udyam	Yes
Medium enterprise	No
Traders (wholesale and retail) with Udyam registration	Generally no: their Udyam registration is for priority sector lending, and the delayed payment provisions of the MSMED Act do not apply to them
Supplier not registered on Udyam	Generally no

The classification is by investment and turnover under the MSME definitions. Micro and small enterprises currently have specified limits that were revised in 2025; check the current limits on the Udyam portal. The buyer side applies to all businesses claiming the expense as a deduction, whatever their size.

How the days are counted

Day of acceptance: the day goods are delivered or services rendered, or, if the buyer raises an objection within 15 days, the day the objection is resolved.
Deemed acceptance: where no objection is raised within 15 days of delivery, the day of delivery is the day of acceptance.
Written agreement: the agreed credit period applies, but not more than 45 days from acceptance.
No written agreement: payment is due by the 15th day after acceptance.

Worked example 1: payment straddling the year end

A company buys components worth ₹5,00,000 from a small manufacturer registered on Udyam. Goods are accepted on 10 March 2026, and the written purchase order gives 45 days credit. The due date is 24 April 2026 (21 days remaining in March plus 24 days in April). The company pays on 30 April 2026.

Payment is 6 days late.
The ₹5,00,000 expense is not deductible in FY 2025-26, even though it relates to that year and the return is filed months later.
It is deductible in FY 2026-27, the year of payment.

If the company pays tax at an effective 25.168%, its tax for FY 2025-26 rises by ₹1,25,840 (25.168% of ₹5,00,000), and falls by roughly the same amount in FY 2026-27. The total is unchanged, but the cash outflow comes a year earlier, and advance tax for FY 2025-26 may have been underpaid, creating interest.

What if paid on time?

Had the company paid by 24 April 2026, the expense would be deductible in FY 2025-26, even though payment was made after 31 March, because it was within the MSMED time limit.

Worked example 2: no written agreement

A trader buys packaging services worth ₹1,20,000 from a micro enterprise, accepted on 20 March 2026, with no written agreement on credit terms. The 15-day limit gives a due date of 4 April 2026. The trader pays on 10 April 2026. The expense moves to FY 2026-27. A simple written agreement with 45-day terms would have made this payment compliant.

Worked example 3: partial payments

A firm owes ₹3,00,000 to a small enterprise, due 15 March 2026. It pays ₹2,00,000 on 10 March and ₹1,00,000 on 20 May 2026. ₹2,00,000 is deductible in FY 2025-26; ₹1,00,000 is deductible in FY 2026-27.

Interest under the MSMED Act

Separately from income tax, the MSMED Act entitles the supplier to compound interest at three times the bank rate notified by the Reserve Bank of India, with monthly rests, from the due date. This interest is not deductible for income-tax purposes. Suppliers can also approach the MSME Facilitation Council (through the Samadhaan portal) for recovery.

Related reporting

Tax audit report: auditors report amounts inadmissible under this rule, so your payables data must show supplier status and payment dates.
Financial statements: companies disclose amounts due to micro and small enterprises and interest under the MSMED Act in notes to accounts.
MSME Form 1: specified companies file a half-yearly return with the Registrar of Companies for amounts outstanding to micro and small enterprises beyond 45 days.

A payables process that keeps you compliant

Collect Udyam details from every supplier at onboarding: registration number and classification (micro, small, medium), and whether the activity is manufacturing, services or trading.
Tag the vendor master with MSE status and the date of classification. Recheck annually, because classifications change.
Put credit terms in writing for MSE suppliers, not exceeding 45 days. Purchase orders with clear terms count as written agreements in practice; confirm with your advisor.
Record acceptance dates at goods receipt or service completion, not invoice dates.
Compute due dates automatically and run a weekly ageing report for MSE vendors.
Prioritise MSE payments in payment runs ahead of other vendors.
Year-end review: from mid-February, list all MSE dues that will become overdue around 31 March and pay them in time, because the year-end effect is where the tax impact is felt.

Common mistakes

Assuming the rule covers medium enterprises or traders.
Counting from the invoice date instead of the acceptance date.
Believing that paying before the income-tax return due date saves the deduction, as it does for some other items.
Not having written agreements, so the 15-day limit applies.
Vendor masters without Udyam data, making the tax audit disclosure guesswork.
Forgetting the knock-on effect on advance tax for the year.

Suppliers' perspective: what micro and small enterprises should do

If you are a micro or small supplier, the rule works in your favour, but only if your customers know your status. Practical steps:

Share your Udyam certificate with every customer's accounts team, and print your Udyam number on invoices.
Agree written credit terms of up to 45 days in purchase orders or contracts.
Note the acceptance date on delivery documents, so the due date is clear.
Track overdue receivables from customers and remind them that late payment affects their own tax deduction.
Use the MSME Samadhaan portal for persistent delays, after attempting to resolve them directly.

Many larger buyers have tightened payment cycles for MSE vendors since the rule took effect, which has improved cash flow for suppliers who made their status known.

Does this affect GST?

The 45-day rule is an income-tax provision, but GST has its own payment-linked condition: input tax credit must be reversed if you do not pay the supplier within 180 days of the invoice date (rule 37), and can be reclaimed when you pay. A business that pays MSE suppliers within 45 days easily satisfies the GST condition too. See our guide on ITC reversal rules for the GST side, and our year-end tax checklist for where this fits in the annual close.

How Fininvo helps

Fininvo ERP's accounts payable records vendor bills with due dates and ageing, so overdue MSE payables can be reviewed before they cross the limit, and payment tracking ties each payment to the bill it settles. See accounting, reports and pricing.

General information, not tax advice. MSME classifications, the MSMED Act and the corresponding provision of the Income-tax Act, 2025 should be confirmed with your CA.

Frequently Asked Questions

Does the 45-day rule apply to payments to medium enterprises?

No. It applies to micro and small enterprises only. Medium enterprises are not covered.

Are traders registered on Udyam covered?

Generally not, because the MSMED Act's delayed payment provisions do not apply to wholesale and retail traders whose Udyam registration is for priority sector lending. Confirm the position for specific suppliers with your CA.

If I pay after 45 days but before filing my return, is the expense allowed?

No. For this item, the deduction is allowed only in the year of payment if payment is beyond the MSMED Act time limit. The return-filing relief available for other items does not apply.

Can the credit period be longer than 45 days by agreement?

No. Even with a written agreement, the period cannot exceed 45 days from the day of acceptance for this purpose.

How do I know if a supplier is micro or small?

Ask for the Udyam registration certificate, which states the classification, and keep it on file. Recheck periodically, because classification is updated based on investment and turnover.

MSME 45-Day Payment Rule (43B(h)) Explained