MSME Payment under section 37 of the Income-tax Act, 2025 (section 43B of the 1961 Act) explained: this guide covers what Section 37 MSME Payment means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Key Highlights
- Section 37(2)(g) of ITA 2025: MSME payments must be made within 45 days of acceptance of goods/services
- If payment is delayed beyond 45 days: deduction is deferred to the year of actual payment
- Applies only to micro and small enterprises (MSME) — not medium enterprises
- MSME supplier must be registered under MSMED Act 2006
- Only affects buyers who are under mercantile (accrual) accounting — cash basis not affected
- Effective from Assessment Year 2024-25 (Tax Year 2023-24)
1. What is the Section 37 MSME Rule?
Section 37 provides that certain expenses are deductible only when actually paid (not merely accrued). Finance Act 2023 added a new clause specifically for MSME payments: any amount payable to a supplier of goods or services who is a micro or small enterprise is deductible only if actually paid within the time specified under the MSMED Act, 2006.
Under the MSMED Act, the payment deadline to an MSME supplier is:
- 15 days if no written agreement exists between buyer and seller
- 45 days if there is a written agreement (maximum — cannot extend beyond 45 days)
2. Impact of Delayed MSME Payment
| Scenario | Tax Treatment |
|---|---|
| MSME invoice accepted on 1 April 2026; paid by 15 May 2026 | Deductible in Tax Year 2026-27 (paid within 45 days) |
| MSME invoice accepted on 1 April 2026; paid on 1 July 2026 | NOT deductible in Tax Year 2026-27; deductible in Tax Year 2027-28 |
| Non-MSME supplier (any payment date) | Deductible on accrual basis — no 45-day rule |
3. Which MSMEs Are Covered?
The 45-day rule applies only when the supplier is a Micro or Small Enterprise (not Medium) registered under the MSMED Act:
- Micro Enterprise: Investment in plant/machinery up to Rs 1 crore AND turnover up to Rs 5 crore
- Small Enterprise: Investment up to Rs 10 crore AND turnover up to Rs 50 crore
- Medium Enterprise: Investment up to Rs 50 crore AND turnover up to Rs 250 crore — NOT covered by the 45-day TDS rule
4. Verification of MSME Status
Buyers must verify the MSME registration status of their suppliers before classifying them. The MSME Udyam Registration certificate is the evidence. You can verify Udyam registration at the official Udyam portal. Without proper Udyam registration, the supplier may not technically qualify as MSME under the MSMED Act.
5. Practical Compliance Steps
- Identify all MSME suppliers — verify their Udyam registration
- Track acceptance date of each MSME invoice separately
- Set up payment reminders: pay within 45 days from invoice acceptance
- For year-end (March): pay all MSME dues outstanding as on 31 March before filing ITR to claim deduction
- Document whether any payment agreement exists (which affects whether 15-day or 45-day limit applies)
6. Why TaxClue
The MSME 45-day rule has significant cash flow implications and creates unexpected tax additions if ignored. Many businesses discovered large disallowances in Tax Year 2023-24 due to delayed MSME payments. TaxClue identifies MSME payment disallowances and advises on compliance. Contact us for MSME payment compliance review.