MSME Payment Rule 2026: Section 37(2)(g), Old 43B(h), 15/45-Day Limit & Tax Disallowance

For TY 2026-27, the well-known MSME delayed-payment tax rule continues under section 37(2)(g) of the Income-tax Act, 2025. It carries forward the core principle readers knew from old section 43B(h): an amount payable to a qualifying micro or small enterprise beyond the payment period permitted by section 15 of the MSMED Act is allowed as a deduction only on actual payment.

Old Section 43B(h) vs current Section 37(2)(g)

Which suppliers are covered?

The tax disallowance is linked to a supplier that qualifies as a micro or small enterprise under the MSMED framework. Medium enterprises do not fall within this particular clause. Finance teams should therefore avoid using a generic “MSME = covered” flag.

The revised MSME classification effective from 1 April 2025 uses composite investment and turnover criteria:

For tax-working purposes, collect the supplier's current Udyam registration/classification and retain evidence applicable to the relevant period. Do not infer status merely from invoice size or vendor turnover known informally.

15 days vs 45 days

The payment trigger comes from section 15 of the MSMED Act. Where there is no written agreement, payment is generally required before the appointed day, commonly understood as the statutory 15-day period from acceptance/deemed acceptance. Where a written agreement exists, payment can follow the agreed date, but the agreed period cannot exceed 45 days from acceptance/deemed acceptance.

The relevant date is not always the invoice date. Delivery, service completion, acceptance, deemed acceptance and any written objection may affect the computation. This is why a proper MSME ageing report should capture more than invoice date and due date from the vendor master.

Why 31 March creates confusion

An unpaid MSME creditor at year-end is not automatically disallowed. The key question is whether the statutory payment period has expired.

Example: due date after year-end

A small enterprise invoice is accepted on 10 March 2027 and a valid written agreement provides 45 days' credit. The permitted due date falls after 31 March. If the buyer pays within that 45-day period, the expense should not be treated as delayed merely because it remained in creditors on 31 March.

Example: already overdue before year-end

A micro supplier's invoice is accepted on 1 February 2027 with no written credit agreement. If the statutory payment deadline expires and the buyer still has not paid by year-end, the deduction can be deferred until the tax year in which actual payment is made.

Return due date does not cure the delay

The special MSME clause is stricter than several other actual-payment items. Once the relevant micro/small enterprise payment has crossed the MSMED Act deadline, paying it before the income-tax return due date does not automatically restore deduction to the earlier year. Track such amounts separately so they are claimed in the year of actual payment.

Year-end finance and tax-audit workflow

1. Obtain Udyam details from relevant vendors.
2. Classify micro, small and medium suppliers separately.
3. Capture delivery/service completion and acceptance dates.
4. Capture written credit terms.
5. Compute the statutory 15/45-day deadline vendor-wise.
6. Identify invoices overdue at year-end.
7. Reconcile the disallowance working with trade creditors and expense ledgers.
8. Track amounts disallowed in prior years and paid in the current year.
9. Review MSMED interest exposure separately from income-tax deduction.
10. Retain the Udyam evidence and ageing working with the tax file.

Common mistakes

• Treating medium enterprises as covered by the same tax clause.
• Using invoice date mechanically instead of acceptance/deemed acceptance facts.
• Assuming every 31 March outstanding is disallowed.
• Assuming payment before the ITR due date always saves the deduction.
• Failing to track prior-year disallowances for deduction in the year of payment.
• Using old MSME classification limits after 1 April 2025.
• Ignoring written objections/disputes that may affect acceptance timing.

Frequently asked questions

Official references

• Income Tax Department — Section 37
• Ministry of MSME — revised MSME classification
• MSME Samadhaan — delayed payments