Section 43B of Income Tax Act- Tax Deduction on Actual Payment

Section 43B of Income Tax Act

Updated on 24 Oct, 2023

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Section 43B of income tax act provides for deduction of a few statutory expenses in the year in which the expense is paid. This means an assessee can claim a few expenses on a payment basis and not on an accrual basis. While calculating the profits and gains from business or profession the expenses will be allowed as a deduction in the financial year in which it is paid.

What is Section 43B of Income Tax Act, 1961?

While calculating the profits and gains from business or profession under PGBP, an assessee can claim a deduction against the expenses incurred in the financial year. However, a few statutory expenses are allowed in the year those expenses are paid and not in the year those expenses accrue. Section 43B of the income tax act, 1961 deals with such expenses or deductions.

Further, if the expense is paid on or before the due date of filing an income tax return then the deduction is allowed for the financial year itself.

For example- Mr. Arun pays EPF contribution for the month of March 2020 amounting to Rs 20000 on 23rd August 2020. Now, since Mr. Arun pays the EPF contribution in the financial year 2021-22, the expense must be available as a deduction in the FY 2021-22. He pays the amount on or before the due of filing an income tax return for FY 2019-20 i.e. 30th September 2020. Since he pays the expense before 30th September 2020, the expense will be allowed as a deduction in the FY 2019-20 itself.

Now, the expense which is claimed as an expense in the financial year cannot be claimed again in the financial year in which payment is made. For example- Mr. Ajay pays interest on a loan of Rs 30,000 for the month of March 2020 on 25th September. Here he can claim the deduction in the FY 2019-20 since he has paid interest before the due date of filing ITR. Now, he cannot claim the same expense of Rs 30,000 for interest on loan again in the financial year 2021-22.

Illustration on Deduction Under Section 43B of Income Tax Act

Case – 1 Payment is made on or before the due date of filing income tax return

ABC Limited has an interest on a loan to be payable for the month of March 2020. The loan is taken from a Scheduled Bank in accordance with the conditions governing such loan. ABC Limited pays the interest on 15th May 2020 i.e. before the due date of filing income tax return of FY 2019-20. Hence, AMC Limited can claim the deduction against interest payable on a loan.

Case – 2 Payment is made after the due date of filing income tax return

ABC Limited pays the interest on 18th October 2020. The due date for filing an income tax return is 30th September 2019. AMC Limited has paid the interest on the loan after the due date of filing the income tax return of FY 2019-20. Hence, AMC Limited cannot claim the deduction against interest payable on a loan.

Types of Payment Under Section 43B where the Provisions Apply

Tax Payments To The Government

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. Any law includes GST, income tax payment, customs duty, and taxes such as basic tax, cess, surcharge, interest, and so on.

Contribution Towards the Welfare of Employees by the Assessee

Any sum is payable by the assessee as an employer by way of contribution. The contribution is towards the welfare of employees. Contributions such as any provident fund or superannuation fund or gratuity fund or any other fund for the welfare of employees.

Bonus or Commission to Employees by the Assessee

Any sum is payable to employees as a bonus or commission against the services the employees provide during the financial year. Here, it is important to understand that there must exist an employer and employee relationship. Any payment of commission under an agent and a principal relationship does not form part of Section 43B

Interest on Loan taken From a Financial Institution

Any sum is payable by the assessee as interest on loans or borrowings. The interest is payable as per the provisions of the loan or borrowing agreement. The loan is taken from a public financial institution or a State financial corporation or a State industrial investment corporation.

Interest on Loan taken From a Bank

Any sum is payable by the assessee as interest on loan or advances. The interest is payable as per the provisions of the loan or advance agreement. The loan or advance is taken from a scheduled bank. Any bank also includes a co-operative bank or a primary co-operative agricultural and rural development bank. However, a primary agricultural credit society is not included.

Leave Encashment to Employees

Any sum payable by the assessee, being an employer as leave encashment to its employees.

Payment To Indian Railways Against Use Of Assets

Any sum payable for the use of railway assets to the Indian Railways

Exception to Section 43B of Income Tax Act

The assessee can claim a deduction against payments under the accrual system if he/ she satisfies the following conditions:

The assessee maintains the books of accounts on a mercantile basis
The payment of the expense is made on or before the due date of filing an income tax return.
Along with the income tax return, the assessee submits the proof of the payments. With the new form of ITR, it is not possible to attach any proof as an annexure. Hence, the assessee must preserve such proofs and present them to the assessing officer as and when the officer demands as a part of the assessment process.