Section 37 · Computation of total income
Section 37 of the Income-tax Act, 2025 — Certain Deductions Allowed Only on Actual Payment Basis (Old Section 43B)
By CA Rajat Agrawal
Updated 04 Jul 2026
Chapter IV
📜 What the law says — Section 37, Income-tax Act 2025
37. (1) The sums payable, as specified in sub-section (2), which are otherwise
allowable as a deduction under this Act, shall be allowed as a deduction while
computing the income chargeable under section 26 only in the tax year in which
such sums are actually paid irrespective of—
(a) any provision to the contrary in this Act; or
(b) method of accounting regularly followed; or
(c) the tax year in which the liability was incurred.
(2) The sums payable for the purposes of sub-section (1), shall be—
(a) tax, duty, cess, surcharge or fee, by whatever named called, levied under
any law in force;
(b) contribution of the employer to a provident fund or superannuation fund
or gratuity fund or any fund for the welfare of employees;
(c) amount payable by employer in lieu of any leave at the credit of the
employee;
(d) any sum referred to in section 32(a);
(e) interest on loans or advances or borrowings from specified financial
entities as per the terms and conditions of the agreement governing such
loans or advances or borrowings;
(f) amount payable to the Indian Railways for use of railway assets; or
(g) amount payable by the assessee to a micro or small enterprise beyond
the time limit specified in section 15 of the Micro, Small and Medium
Enterprises Development Act, 2006 (27 of 2006).
(3) In case the amounts specified in sub-section (2), except the sum referred to in
clause (g) thereof, are paid after the end of the tax year in which the liability was
incurred, but on or before the due date of filing of return of income under section
263(1) for such tax year, the deduction towards such sum shall be allowed in such
tax year.
(4) If interest on loans or advances or borrowings specified in sub-section (2)(e) is
converted into a loan or advance or debenture or any other instrument by which
the liability to pay is deferred to a future date, then it shall not be deemed to have
been actually paid.
(5) If a deduction in respect of any sum payable under sub-section (2) has already
been allowed in any tax year when such liability was incurred, it shall not be
allowed again in any subsequent tax year when it is paid.
(6) The provisions of this section shall not apply to a sum received by the assessee
from any employee as contribution towards any of the funds referred to in section
2(49)(o).
(7) For the purposes of this s
In plain language
What Section 37 actually means
Section 37 of the Income-tax Act, 2025 lays down a simple but powerful rule for businesses and professionals: for a specific list of expenses, you get the deduction only in the year you actually pay the money — not in the year the liability was booked in your accounts. This is true even if you follow the accrual (mercantile) system of accounting and even if the expense clearly relates to an earlier year.
This section is the direct successor to the well-known Section 43B of the Income-tax Act, 1961. The rule and its logic have been carried forward almost unchanged into the 2025 Act, which is effective from 1 April 2026 (tax year 2026-27 onwards). If you understood 43B, you already understand Section 37.
Who does it apply to
- All persons earning income under "Profits and gains of business or profession" — proprietors, partnership firms, LLPs, companies, professionals.
- It matters most for taxpayers on the accrual/mercantile basis, because they normally claim expenses when the liability arises. Section 37 overrides that for the listed items.
- Taxpayers on a pure cash basis are less affected, since they already deduct only what is paid.
The seven categories covered (sub-section 2)
Deduction of the following is deferred until actual payment:
- (a) Taxes, duties, cess, surcharge or fee — any statutory levy, e.g. GST payable, customs/excise, property tax, professional tax.
- (b) Employer contributions to provident fund, superannuation fund, gratuity fund or any employee welfare fund.
- (c) Leave encashment — sums payable to an employee in lieu of leave to their credit.
- (d) Bonus or commission payable to employees for services rendered.
- (e) Interest on loans/advances/borrowings from scheduled banks, co-operative banks, public financial institutions (like LIC), and NBFCs.
- (f) Payments to Indian Railways for use of railway assets/services.
- (g) Amounts payable to Micro & Small Enterprises (MSMEs) beyond the time limit under Section 15 of the MSME Development Act, 2006.
The crucial relief — pay before the ITR due date
For categories (a) to (f), sub-section (3) gives valuable breathing room: if you pay the amount after the year-end but on or before the due date for filing your return of income (and you file evidence of payment), the deduction is still allowed in the original year in which the liability arose. So GST or bank interest for FY 2026-27 paid before your return due date can still be claimed in FY 2026-27.
The big exception is MSME dues — clause (g). There is no "pay before return due date" relief. Payment to a micro or small enterprise must be made within the MSME Act timeline — 15 days where there is no written agreement, and up to 45 days where an agreement exists. Miss that window, and the deduction is pushed to the year of actual payment, even by a single day.
Two anti-abuse safeguards
- Interest conversion is not "payment" (sub-section 4): If you convert unpaid interest into a fresh loan, advance or debenture, the law does not treat it as actually paid. The deduction stays blocked until you pay real money.
- No double deduction (sub-section 5): If you already claimed an expense on accrual, you cannot claim it again when you pay it later.
How it interacts with related sections
- Section 28 / general deduction (old 37(1)): Note that the 1961 "general business expenditure" section (old Sec 37(1)) is a different provision — in the 2025 Act, general deductions sit elsewhere (broadly Section 33). This Section 37 is specifically the "actual payment" gatekeeper.
- Employee PF/ESI: Employees' own contributions deducted from salary have a separate, stricter rule (deposit by the due date under the relevant labour law); Section 37(b) governs only the employer's share.
- Tax audit reporting: Auditors must report Section 37 (old 43B) disallowances in the tax audit report, so proper tracking is essential.
Practical implications
- Reconcile your GST, TDS-on-expense, PF/ESI, bank interest and MSME ledgers before 31 March and again before your return due date.
- Maintain a supplier list flagging Udyam-registered micro/small vendors — clause (g) is the most common cause of unexpected disallowance.
- Keep payment challans/proofs ready; the relief in sub-section (3) is conditional on evidence of payment being furnished.
💡 Example
Example 1 — GST paid before the return due date (allowed). Sharma Traders (accrual basis) has GST payable of ₹2,40,000 for FY 2026-27 outstanding on 31 March 2027. The firm pays it on 15 September 2027, before its ITR due date of 31 October 2027. Because GST falls under clause (a) and payment was made before the return due date, the full ₹2,40,000 is deductible in FY 2026-27 under sub-section (3). Had it remained unpaid past the due date, the deduction would shift to FY 2027-28.
Example 2 — MSME payment missed by a few days (disallowed). Verma Manufacturing buys raw material worth ₹6,00,000 from a micro enterprise on credit with a written 45-day agreement, invoice dated 1 March 2027. Payment is made on 30 May 2027 — beyond the 45-day limit (which ended around 15 April 2027). Under clause (g) there is no return-due-date relief, so the ₹6,00,000 cannot be deducted in FY 2026-27. Assuming a 30% tax bracket, the firm faces extra tax of roughly ₹1,80,000 for that year; the deduction is only available in FY 2027-28 when payment was actually made.
A relatable story. Priya runs a small design studio and always paid her vendors "eventually." One March, her CA flagged that a ₹1.5 lakh printing bill was from a Udyam-registered micro vendor, unpaid for 60 days. Priya assumed she could just pay it before filing, like she does with GST. Her CA explained that Section 37(g) is unforgiving for MSMEs — pay within 45 days or lose the deduction for the whole year. Priya cleared the bill immediately the next year and set up a "pay MSME vendors first" reminder. One simple habit saved her a chunky tax hit the following year.
| Expense category (Sec 37(2)) | Example | "Pay before ITR due date" relief? | Deduction timing if paid late |
|---|
| (a) Tax, duty, cess, fee | GST, customs, property tax | Yes | Year of actual payment |
| (b) Employer PF/ESI/gratuity contribution | Employer's PF share | Yes | Year of actual payment |
| (c) Leave encashment | Payment in lieu of leave | Yes | Year of actual payment |
| (d) Bonus / commission to employees | Annual bonus | Yes | Year of actual payment |
| (e) Interest to banks / NBFCs / PFIs | Term loan interest | Yes | Year of actual payment |
| (f) Payments to Indian Railways | Siding/asset use charges | Yes | Year of actual payment |
| (g) Dues to Micro/Small enterprises | Vendor bill (Udyam MSME) | No — must pay within 15/45 days | Year of actual payment |
Related sections
Section 33 — General deductions for business or profession Section 32 — Depreciation on business assets Section 26 — Income chargeable under business or profession Section 38 — Amounts not deductible (disallowances) Section 15, MSME Development Act, 2006 — Payment timelines to MSMEs Section 43B of the 1961 Act — Predecessor provision
Frequently asked questions
What is the difference between Section 37 of the 2025 Act and old Section 43B?
They are essentially the same rule. Section 37 of the Income-tax Act, 2025 is the re-numbered and re-worded successor to Section 43B of the 1961 Act, keeping the 'deduction only on actual payment' principle for the same list of expenses. It applies from 1 April 2026.
If I pay my GST or bank interest after 31 March but before filing my return, can I still claim it?
Yes. For categories (a) to (f) — including taxes, PF, bonus and bank interest — sub-section (3) allows the deduction in the original year if you pay on or before the due date for filing your return and furnish proof of payment.
Why are payments to MSMEs treated more strictly?
Clause (g) does not give the 'pay before return due date' relief. If you don't pay a micro or small enterprise within 15 days (no agreement) or 45 days (with agreement) under the MSME Act, the deduction is deferred to the year you actually pay — even a one-day delay disallows it for that year.
Does converting unpaid interest into a new loan count as payment?
No. Sub-section (4) specifically states that converting outstanding interest into a loan, advance or debenture is not treated as actual payment. The deduction remains blocked until you pay real money.
Does Section 37 apply to the employee's share of PF deducted from salary?
No. Section 37(b) covers only the employer's contribution. The employee's own contribution recovered from salary is governed by a separate, stricter rule requiring deposit by the due date under the relevant labour law.
I follow the cash system of accounting. Does Section 37 affect me?
Very little. Cash-basis taxpayers already claim expenses only when paid, so the 'actual payment' rule generally aligns with how you already compute income. Section 37 mainly impacts accrual/mercantile taxpayers.
Can I claim the same expense twice — once on accrual and again on payment?
No. Sub-section (5) prevents double deduction. If you already claimed an amount when the liability arose, you cannot claim it again in the year of payment.
C
CA Rajat Agrawal
Chartered Accountant, EaseValue · Reviewed 04 Jul 2026
This explainer is prepared and reviewed by EaseValue's tax team, based on the text of the Income-tax Act, 2025 (as amended by the Finance Act, 2026).
Disclaimer: This page explains the law in general terms for education and is not professional advice. The Income-tax Act, 2025 takes effect from 1 April 2026; provisions, thresholds and interpretations may change. Please confirm your specific position with our team before acting.
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