Section 43B of Income Tax Act 1961 – Important Section 37 of Income Tax Act 2025

Section 43B of Income Tax Act 1961 has always been a crucial parameter for a range of deductions that are allowed only on actual payment basis. Section 43B of Income Tax Act 1961 has been an important pre-requisite for claiming deductions for over the last few decades. With the introduction of the new direct tax law from FY 2026-27, 2025, Section 37 of the Income Tax Act, 2025 has replaced the erstwhile Section 43B of Income Tax Act 1961.

The new law in alignment with the existing law has highlighted certain deductions that are allowed on actual payment basis only. Let us understand the applicability and coverage of these deductions while also deciphering the difference between the old and the new law.

Section 37 (erstwhile Section 43B of Income Tax Act 1961)

Section 37 (erstwhile Section 43B) – ‘Certain deductions allowed on actual payment basis only’ contains a list of expenses disallowed under section 43B of the Income Tax Act 1961 and under section 37 of the new Income Tax Act, 2025 unless actual payment for such expenses has been made i.e. the deduction for such expenses will be allowed only in the tax year in which the actual payment has been made.

Expenses covered under Section 37 (erstwhile Section 43B of Income Tax Act 1961)

The “sum payable” covered under Section 37(2) of Income Tax Act 2025 (erstwhile Section 43B) that will be allowed for deduction under section 26 –

1. Taxes, duties, cess, surcharge or fees, by whatever name called, levied under any law in force,
2. Employer’s contribution to a provident fund or superannuation fund or gratuity fund or any other fund for the purpose of welfare of their employees. Thus, employees contribution towards any of the funds will not be covered u/s 37,
3. Amount payable by an employer in lieu of any leave at the credit of the employee,
4. Any amount referred u/s 32(a) of the Income Tax Act, 2025 i.e. bonus or commission for services rendered by employees and not as a component of profit participation for employees,
5. 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,
6. Amount payable to the Indian Railways for the use of railway assets,
7. Amount payable by the assessee to an entity registered under the MSME Act, 2006 beyond the time limit as specified u/s 15 of the MSME Act, 2006.

Here, the term ‘”sum payable” means a sum for which the assessee has incurred liability in the tax year even though such sum might not have been payable within that year under that relevant law.

Time limit for payment to claim deduction

As explained above, certain deductions will only be allowed for deduction on actual payment basis. Therefore, it is pertinent to remember that under Section 37(3) of the Income Tax Act, 2025 (erstwhile Section 43B of the Income Tax Act 1961) for all the above mentioned expenses except (g) that are paid after the end of the tax year in which the liability was incurred, but paid on or before the due date of filing of return of income u/s 263(1) for such tax year, the deduction towards such sum shall be allowed in such tax year.

Moreover, it has been specifically mentioned in Section 37(5), that if a deduction has been allowed in any tax year when such liability was incurred, the deduction for the same will not be allowed again in any subsequent tax year when it is paid.

Conversion of interest to loan

As per the expenses listed above covered under section 37 of the Income Tax Act, 2025, the interest on loans from specified financial entities will be allowed as a deduction only on actual payment basis. However u/s 37(4) it has been expressly specified that any conversion of the interest component to another loan or advance or borrowing or debenture or any other financial instrument by which the actual liability to pay has been deferred to a future date, shall not be deemed to have been actually paid. Therefore, the same will be disallowed u/s 37.

The term ‘specified financial entities’ here means a Public Financial Institution or State Financial Corporation or State Industrial Investment Corporation or such class of NBFCs as may be notified by the Central Government or a scheduled bank or a cooperative bank (other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank.)

Difference between Section 37 of Income Tax Act, 2025 and Section 43B of Income Tax Act, 1961

The primary difference between Section 37 of Income Tax Act, 2025 and Section 43B of Income Tax Act, 1961 is that the old section had been amended multiple times over the last few decades and therefore it had 8 long explanations. However, Section 37 of Income Tax Act, 2025 incorporates all these explanations in a more concise manner and is more streamlined than Section 43B of the Income Tax Act, 2025.

Moreover, sub-section 1 of Section 37 of Income Tax Act, 2025 expressly includes the following clause which was not in the erstwhile Section 43B of Income Tax Act 1961 which states that the sum payable as mentioned above will be considered for deduction u/s 26 only in the tax year in which such sums are actually paid irrespective of –

• Any provision to the contrary in this Act, or
• Method of accounting regularly followed, or
• The tax year in which the liability was incurred.

Implication of Section 37 on advance payments

In the case of CIT vs C.L. Gupta and Sons (2003) 259 ITR 513 (AII) it was decided that if a payment is made in  advance, it can be allowed in the year of payment, though the amount is deductible in normal circumstances under the law in the year in which it is booked as expenditure.

FAQs

Q1. What is Section 43B of Income Tax Act, 1961?

A1. Section 37 (erstwhile Section 43B) – ‘Certain deductions allowed on actual payment basis only’ contains a list of expenses disallowed under section 43B of the Income Tax Act 1961 and under section 37 of the new Income Tax Act, 2025 unless actual payment for such expenses has been made.

About the Author – This article is written by FCA Eshita Krishna , an experienced Chartered Accountant with advanced ICAI certifications in DISA, Anti-Money Laundering, Real Estate Laws, and Forex & Treasury Management. With strong expertise in direct and indirect tax, audit, risk advisory, financial planning, and financial management, she delivers accurate, experience-backed financial insights to readers.