Section 43B of income tax act provides certain expenses are allowed on actual payment basis. It means expenses are not allowed on due basis but allowed when actual payment is made.
What is section 43B??
Section 43B deals with specified mode of payment. Like expenses can be claim as deduction from business income only in the year of actual payment & not in the year when such expenses are accrued.
In brief, for availing deduction under section 43B two conditions needs to be satisfied i.e.
- Expenses should be of previous year and
- Actual payment should be made on or before due date specified u/s 139(1)
For instance Liability incurred on 31.12.22 but payment made on 15.10.23,then this expense will be allow as deduction from business income in the financial year 2023-24.
Types of payments covered under section 43B of income tax act
There are different types of payments where section 43B applies.
1) Tax , Duty , Cess or Fee -> means payment of these taxes is allowed as deduction only on actual payment on or before due date specified in section 139(1).
For instance Profession tax paid on 15.07.2023, than this tax expenses can be allowed as deduction u/s 43B as the payment is made before the due date of filing income tax return.
2) Employer contribution to any Provident Fund/superannuation Fund/Gratuity Fund or any other fund for welfare of the employees.
3) Any amount payable by employer to employees as bonus or commission => that is employer can get tax deduction for any bonus or commission they have paid to employees . Such sum should not be paid as ordinary circumstances as dividend or profit.
4) Interest on Loan/Borrowing from Public Financial Institutions/ State Financial Institutions/ State Industrial Investment Corporations in accordance with terms and conditions of the agreement governing such loans or borrowings.
5) Interest payable on loans or advances => Interest charges payable by assessee on loan and advance taken from a scheduled bank in accordance with terms and conditions under the agreements.
6) Leave encashment paid by employer to employee towards encashment of leave balance.
7) Payment made by assessee to indian railway is allowed to be claimed as expenses as and when the payment is made.
Further, Interest mentioned above in point 4 & 5 is not deductible if converted into loan due to non payment of such interest. However, converted interest will be eligible for deduction in the computation of income of previous year in which the converted interest is actually paid.
Exceptions to section 43B of income tax act
It means taxpayer can claim deduction under section 43B even if payments are made on accrual basis. However to make best out of it certain conditions needs to be followed. That is
- Taxpayer decided to follow mercantile system of accounting &
- Where all the payments are cleared on or before due date of filing income tax returns
- Assessee needs to submit substantial proof of payments while filing income tax returns
Frequently asked questions
1. Advance tax payment is allowed as deduction u/s 43B??
Section 43B provides deduction of expenses on actual payment basis. Thus advance tax payment can be claimed as deduction u/s 43B.
2. Interest paid for late payment of Income tax can be claimed as deduction u/s 43B??
No, Interest paid on direct tax is not allowed as deduction. However interest on income tax refund is taxable under head “Income from other sources”.
3. Can TDS payment is allowed as deduction u/s 43B??
TDS is not an expenses but tax which is deductible on behalf of deductee and deposited to Govt. treasury. Hence, TDS is not deductible u/s 43B.
4. Interest on Sales tax can be claimed as deduction u/s 43B??
Yes, Interest paid to sales tax department is part of sales tax. Therefore, It is allowed as deduction u/s 43B. But Payment should be made on or before due date of filing income tax return u/s 139(1).
