As a taxpayer, it is important to understand the various sections of the Income Tax Act to ensure compliance with the law and avoid any penalties or legal implications. One such section that taxpayers must be aware of is Section 43B of the Income Tax Act. In this blog, we will take a closer look at Section 43B, its provisions, and provide examples to help you better understand the implications of this section.
What is Section 43B of Income Tax Act?
Section 43B of the Income Tax Act, 1961, deals with certain deductions that are allowed only on actual payment basis. This section applies to both individuals and businesses and aims to ensure that taxpayers claim deductions only when the payment has been made, rather than when it is due. Section 43B of the Income Tax Act applies to the following expenses:
- Interest on certain loans and borrowings
- Taxes and duties payable by the taxpayer
- Bonus or commission payable to employees
- Contributions to provident fund, superannuation fund, or any other fund for the welfare of employees
- Leave encashment
Provisions of Section 43B
Section 43B of the Income Tax Act provides that any deduction in respect of the above expenses shall be allowed only when the payment has been made by the taxpayer on or before the due date for filing the tax return. The due date for filing the tax return is typically July 31st of each financial year. However, if the payment is made after the due date, the deduction can still be claimed in the year of payment.
For example, let us assume that Mr. A has a tax liability of Rs. 5,00,000 for the financial year 2022-23. He is required to pay a tax of Rs. 5,00,000 by July 31, 2023. Mr. A has also paid a bonus of Rs. 50,000 to his employees on March 31, 2023. If he wants to claim a deduction for this bonus payment, he must pay the bonus on or before July 31, 2023, which is the due date for filing his tax return. If he pays the bonus after July 31, 2023, he can still claim the deduction for the financial year 2023-24.
Exceptions to Section 43B
There are certain exceptions to the provisions of Section 43B of the Income Tax Act. For instance, any sum payable by the taxpayer by way of interest on any loan or borrowing from a public financial institution, a state financial corporation, or a state industrial investment corporation, is allowed as a deduction in the year of accrual.
Conclusion
In conclusion, Section 43B of the Income Tax Act is a crucial provision that taxpayers must be aware of to ensure compliance with the law and avoid any legal implications. This section ensures that deductions are claimed only when the payment has been made, rather than when it is due, and applies to expenses such as interest on loans, taxes and duties, bonus or commission payable to employees, contributions to provident fund, superannuation fund, or any other fund for the welfare of employees, and leave encashment. However, there are exceptions to this provision, such as interest payable on loans or borrowings from public financial institutions, state financial corporations, or state industrial investment corporations. By understanding the provisions of Section 43B, taxpayers can effectively manage their finances and avoid any penalties or legal issues related to non-compliance.
Read more useful content:
- section 234e of income tax act
- section 286 of income tax act
- section 90a of income tax act
- section 40a(7) of income tax act
- section 226(3) of income tax act
- section 24 of income tax act
Frequently Asked Questions (FAQs)
Q: What is Section 43B of the Income Tax Act?
A: Section 43B of the Income Tax Act is a provision that lays down certain expenses that are allowed as deductions only on payment basis. This means that the deduction can be claimed only in the year in which the payment is made, regardless of the year in which the expense was incurred.
Q: What are the expenses covered under Section 43B?
A: The following expenses are covered under Section 43B:
- Interest on any loan or borrowing from a public financial institution, State financial corporation or State industrial investment corporation.
- Interest on any loan or borrowing from a scheduled bank.
- Interest on any loan or borrowing from a co-operative society engaged in banking business.
- Any sum payable by the employer as contributions to any provident fund or superannuation fund.
- Any sum payable as bonus or commission to employees.
- Any sum payable as leave encashment to employees.
- Any sum payable as the employer’s contribution to any fund set up for the welfare of employees.
Q: Can expenses covered under Section 43B be claimed as a deduction in the year in which they are incurred?
A: No, expenses covered under Section 43B can be claimed as a deduction only in the year in which the payment is made.
Q: Are there any exceptions to the payment basis rule for expenses covered under Section 43B?
A: Yes, there are two exceptions to the payment basis rule:
In the case of employer’s contribution to any provident fund, superannuation fund, or any other fund for the welfare of employees, the deduction can be claimed in the year in which the contribution is due.
In the case of bonus or commission payable to employees, the deduction can be claimed in the year in which the liability to pay the bonus or commission is incurred.
Q: Can expenses covered under Section 43B be carried forward to subsequent years?
A: No, expenses covered under Section 43B cannot be carried forward to subsequent years. They can only be claimed as a deduction in the year in which the payment is made.
