Summary: The new Section 37 of the Income Tax Act 2025 (earlier corresponding to Section 43B of the 1961 Act) mandates that specified expenses are deductible only on actual payment, regardless of accounting method or the year in which liability arose. These include taxes, duties, cess, employer contributions to PF/ESI and other welfare funds, leave encashment, bonuses, specified interest on loans, payments to Indian Railways, and overdue payments to MSMEs beyond the timelines under the MSME Act. Except for MSME dues, deductions for these expenses are permitted even if paid after the tax year, provided payment is made before the ITR due date. MSME payments, however, must be paid within the statutory 15/45-day limit to qualify. The law also clarifies that converting unpaid interest into another instrument does not count as “actual payment,” and deductions already claimed on accrual cannot be repeated. Overall, the section ensures tighter compliance and promotes timely settlement of statutory and contractual obligations.
Certain deductions allowed on actual payment basis-
Sec 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.
Analysis- All sums payable as specified in sub-section(2) shall be allowed as deduction only in the tax year in which such sums are actually paid irrespective of which method of accounting followed by taxpayer or 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.
Analysis- Now what payments covered under this section let us discuss that-
(a) Tax, Duty, Cess or Fee –
- Any sum payable to the Government (GST, Excise, Customs, etc.).
(b) Employer’s Contribution to Employee Welfare Funds
- PF (Provident Fund)
- ESI (Employees’ State Insurance)
- Superannuation Fund
- Any other employee welfare fund
(c) Payment in lieu of Leave Encashment
(d) Bonus or commission to employees
(e) Interest on Loan or Borrowings-
- Interest payable to public financial institutions (e.g., LIC, UTI)
- Interest payable to scheduled banks
- Interest to NBFCs
(f) Payment to Indian Railways -For use of railway assets/services.
(g) Amount payable by the assessee to a micro or small enterprise after 15/ 45 days as prescribed under MSME Act 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.
Analysis- Deduction allowed even paid after the end of the year except clause (g) if paid before the due date of filing ITR– ITR DUE DATE BENEFIT does not apply to MSME payment.
(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.
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Analysis- In case deduction allowed if paid before filling return of income then not allowed again in any subsequent year….
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