Section 43B(h) Is Now Section 37(2)(g): The MSME Payment Rule Under the Income-tax Act 2025

Short answer: the MSME payment disallowance survived the rewrite of India's income tax law. It moved from Section 43B(h) of the 1961 Act to Section 37(2)(g) of the Income-tax Act, 2025, which commenced on 1 April 2026. The 15-day and 45-day deadlines, the micro-and-small-only scope, and the consequence for a buyer who pays late are all identical. Only the citation changed.

If you are a freelancer or small supplier who has been quoting "Section 43B(h)" in your payment follow-ups, you now need to know which number to use, and when.

Which Act governs which year

This is the part that catches people out, because two Acts are live at the same time right now.

The Income-tax Act, 2025 was passed by the Lok Sabha on 11 August 2025 and the Rajya Sabha the following day, received Presidential assent on 21 August 2025, and commenced on 1 April 2026. It repeals the Income-tax Act, 1961.

But repeal does not reach backwards. The test is period-based: identify the financial year your computation relates to, then apply the Act that governed that period.

So the tax audit under Section 44AB and the return for FY 2025-26 — both filed in the second half of 2026 — still run on the old Act and the old section number. Section 536 of the 2025 Act is the general saving clause that makes this work: rights accrued and liabilities incurred under the 1961 Act survive its repeal.

Practically, that means for the rest of 2026 you may need both numbers depending on which invoice you are chasing.

What actually changed

The numbering. That is close to the whole list.

The 2025 Act also brings in "Tax Year" as the operative period concept, replacing the previous-year and assessment-year pairing that confused everybody for six decades. When your client's finance team refers to Tax Year 2026-27, they mean the year running from 1 April 2026.

What did not change

Every part of the rule that gives you leverage.

A buyer must pay a registered micro or small enterprise within 15 days of accepting the goods or services where there is no written agreement. Where there is one, the agreed date governs — but it cannot exceed 45 days, no matter what the contract says. These limits sit in Section 15 of the MSMED Act, 2006, which the new tax Act did not touch.

Miss that window and the buyer cannot deduct your invoice in the year they incurred it. The deduction moves to the year they actually pay. For a client sitting on a March invoice, that is a real cash cost in the current year, not a paperwork nuisance.

The scope is still narrow in a way that works in your favour if you qualify and against you if you don't. It bites only on dues to micro and small enterprises — medium enterprises are excluded — and only where the supplier holds Udyam registration as a manufacturer or service provider. Traders are out.

Most freelancers — designers, developers, writers, consultants, agencies — are service providers and comfortably inside "micro."

The detail your client's CA already knows

Section 43B generally has a rescue hatch. Pay the outstanding amount before the return due date and you keep the deduction in the original year. That proviso does not extend to the MSME clause, and it still doesn't under Section 37(2)(g).

Breach the MSMED timeline by one day and the deduction shifts to the year of payment. Settling the dues the very next morning does not undo it.

This is why a February or March reminder that references the rule lands differently from a generic nudge. You are not threatening anyone. You are pointing at a deadline their own auditor is going to flag in Clause 22 of Form 3CD, and companies additionally have to disclose MSME dues outstanding beyond 45 days in the half-yearly Form MSME-1.

Are you actually micro or small?

Worth rechecking, because the classification limits moved on 1 April 2025 under Ministry of MSME Notification S.O. 1364(E) and a lot of published guidance still shows the 2020 numbers.

Both figures have to stay inside the band. Exports are excluded from turnover, so a strong export year won't push you up a bracket. The same limits apply to manufacturing and services alike.

If you are somewhere near the small-to-medium boundary, check carefully — crossing into medium takes you outside the disallowance entirely, and with it most of your leverage.

The interest is separate, and it is not small

Under Section 16 of the MSMED Act, a buyer who pays a micro or small supplier late owes compound interest at three times the RBI bank rate, with monthly rests, running from the day after the due date until payment lands.

Check the current bank rate on rbi.org.in before you put a number in an email — it moves.

Two things buyers tend not to know. The interest is a statutory entitlement, not a negotiation. And under Section 23 of the MSMED Act, the interest they pay you on a delayed MSME payment is itself not deductible for them.

A reminder template with the correct citation

Keep it factual. The finance team on the other end already understands the rule; you are helping them avoid a disallowance, not accusing them of anything.

Subject: Invoice #[number] — MSME payment timeline
Hi [Name],
Following up on Invoice #[number] for ₹[amount], for work accepted on [date]. We're registered on Udyam as a [micro/small] enterprise (Udyam: [number]), so this invoice falls under the MSMED Act's [15/45]-day payment window, which it has now passed.
Could you confirm a payment date this week? Settling it keeps the amount deductible in the current year — the MSME disallowance that used to sit at Section 43B(h) now sits at Section 37(2)(g) of the Income-tax Act, 2025, and there's no relief for paying before the return due date.
Happy to send anything your accounts team needs.
Thanks,
[Your name]

If the invoice relates to work accepted before 1 April 2026, cite 43B(h) instead. If you would rather not get into section numbers at all, "the MSMED Act's 45-day payment window" does most of the work on its own.

If reminders stop working

MSME Samadhaan is the formal route. Filing at samadhaan.msme.gov.in is free, the case goes to your state's Micro and Small Enterprise Facilitation Council, and the council is required to dispose of the reference within 90 days.

Most people never get there. Being visibly registered, tracking the deadline per invoice, and referencing the rule calmly is usually enough to unstick an invoice — precisely because the buyer's exposure is now measurable.

Track the deadline, not the section number

The renumbering is a footnote. The thing that actually gets you paid is knowing, per invoice, the acceptance date and the exact day the statutory window closes — and following up on that day rather than three weeks later when you happen to remember.

Foloque tracks the clock on every invoice and sends the polite escalating reminders on schedule, from your own SMTP. Start free — no credit card.

FAQs about the MSME payment rule under the new Act

What is Section 43B(h) called under the new Income-tax Act 2025?

Tax commentators map the MSME payment disallowance to Section 37(2)(g) of the Income-tax Act, 2025, effective 1 April 2026. The substance of the test is unchanged.

Does the old Section 43B(h) still apply to FY 2025-26?

Yes. The year ended 31 March 2026 is the last full year under the 1961 Act, so returns and tax audits for it — filed in late 2026 — still run on Section 43B(h).

Did the 15-day and 45-day deadlines change?

No. Both come from Section 15 of the MSMED Act, 2006, which was not amended by the new tax Act.

Can a buyer fix a missed deadline by paying before the return due date?

No. The MSME clause has never had that proviso, and it still doesn't.

Does this apply to traders?

No. It covers micro and small enterprises registered as manufacturers or service providers. Wholesale and retail traders sit outside it even with Udyam registration.

Does it apply to medium enterprises?

No. Micro and small only.