Section 43B: Deduction of certain payments only if actually paid

Ritik Chopra | Last updated: 06 May 2021

Save Share

Quick Summary

Section 43B of the Income Tax Act clarifies that certain business expenses, including taxes, duties, employer contributions to funds like provident or gratuity funds, and employee bonuses, are only deductible in the year they are actually paid. If a deduction was previously claimed on an accrual basis, it cannot be claimed again upon payment. Payments made after the financial year-end but before the tax return filing deadline are generally allowed in the year they relate to, but specific rules apply, especially for provident fund and ESI contributions.

Any payment of sales tax, employer's contribution to any provident fund, superannuation fund or gratuity fund, or any other fund for the welfare of employees will be allowed only in computing the income of that previous year in which such sum is actually paid by him. In case a deduction has already been claimed on an accrual basis in any earlier previous year, it will not be allowed again in the year in which it is actually paid.

Section 43B: Payments Must Be Actually Paid for Deduction

Now let us discuss what these payments include. These payments include:

(a) any sum payable by the assessee by way of tax, duty, cess or fee by whatever name called under any law for the time being in force.

(b) any sum payable by the assessee as an employer by way of contribution of any provident fund, or superannuation fund or gratuity fund or any other fund for the welfare of employees. (c) any sum referred to in clause (ii) of sub-section (1) of section 36, i.e., bonus or commission payable to employees.

(d) any sum payable by assessee as interest on any loan or borrowing from any public financial institution or a State Financial Corporation or a State Industrial Investment Corporation in accordance with the terms and conditions governing such loans or borrowing. Deduction regarding these payments shall be allowed if such payments are actually made before filing of return u/s 139(1).

(e) Any sum payable by the assessee as interest on any loan or borrowing from a deposit taking non-banking financial company or systemically important non-deposit taking non-banking financial company, in accordance with the terms and conditions of the agreement governing such loan or borrowing. [W.e.f. A.Y. 2020-21]

(f) any sum payable by the assessee as interest on any term loan from a scheduled bank or a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank in accordance with the terms and conditions of the agreement governing such loan.

(g) Any amount payable by the assessee as an employer in lieu of any leave at the credit of employee shall be allowed to be debited only if it is made in accordance with the provisions of section 43B.

(h) Any sum payable by the assessee to the Indian Railways for the use of railway assets.

Now let us discuss how these payments shall be allowed. According to the provisions of Section 43B the above payments shall be allowed in following manner :

(i) If all these payments, as mentioned above, are actually paid by the end of previous year i.e. 31st March, such payments shall be fully allowed.

(ii) If payments [as mentioned above at (b) above] of provident fund or employees' state insurance contribution is paid before the due date prescribed under P.F. Act or E.S.I. Corporation Act, such payment shall be fully allowed. In case these payments are made after the due date, these shall never be allowed.

(iii) If all the above payments are paid after 31st March but before the prescribed date of filing of return, it shall be allowed to be debited in the year to which these payments belong. If it is paid after the prescribed date, the payment shall be allowed to be debited in the year in which payment is made.

(iv) In case payments as mentioned above are made by cheque, the proof of their encashment must be submitted within 15 days from due date/prescribed date.

FAQ :

The main principle is that certain specified payments are only allowed as a deduction for tax purposes in the financial year in which they are actually paid, not merely when they become due.

Covered payments include taxes, duties, cess, fees, employer contributions to provident fund, superannuation fund, gratuity fund, employee bonuses or commissions, and interest on certain loans from financial institutions and banks.

No, if a deduction has already been claimed on an accrual basis in an earlier year, it cannot be claimed again in the year of actual payment.

Payments made after the end of the previous year but before the due date for filing the tax return are allowed to be debited in the year to which they relate. If paid after the due date, they are allowed in the year of payment.

Yes, provident fund and employee's state insurance contributions are fully allowed if paid before the due date prescribed under the respective Acts. If paid after the due date, they are never allowed.

If payments are made by cheque, proof of encashment must be submitted within 15 days from the due date or prescribed date.