Section 37
Section 37: certain deductions allowed only on actual payment
Section 37 overrides the accounting method otherwise followed by the assessee, and provides that certain specified sums are deductible while computing business income only in the tax year they are actually paid - not the year the liability was incurred.
This explanation is AI-assisted and pending review by our CA/CS team. It is general information, not professional advice - always cross-check against the bare law text above or talk to our tax team for guidance specific to your situation.
The sums covered
Section 37(2) lists the sums that must be deducted on an actual-payment basis:
- Tax, duty, cess, surcharge or fee (however named) levied under any law in force.
- Employer's contribution to a provident fund, superannuation fund, gratuity fund, or any employee welfare fund.
- Amount payable by the employer in lieu of any leave standing to an employee's credit (leave encashment).
- Any sum referred to in Section 32(a) (bonus or commission to an employee).
- Interest on loans, advances or borrowings from specified financial entities, as per the terms of the relevant agreement.
- Amount payable to Indian Railways for use of railway assets.
- Amount payable by the assessee to a micro or small enterprise beyond the time limit specified under section 15 of the Micro, Small and Medium Enterprises Development Act, 2006.
Payment before the return-filing due date still counts
Section 37(3) provides relief: if these amounts (other than the MSME-dues item) are paid after the end of the relevant tax year but on or before the due date for filing the return under section 263(1), the deduction is still allowed for that earlier tax year.
What does NOT count as "actually paid"
Section 37(4) clarifies that if interest on loans/advances/borrowings from specified financial entities is converted into a loan, advance, debenture or other instrument that defers the liability to a future date, it is not treated as actually paid.
Section 37(5) prevents double deduction - if a deduction for a sum was already allowed in the year the liability was incurred, it cannot be allowed again in a later year when it is actually paid.
Who counts as "specified financial entities"
Section 37(7) defines "specified financial entities" as a public financial institution, State Financial Corporation, State Industrial Investment Corporation, notified classes of non-banking financial companies, a scheduled bank, or a co-operative bank (excluding a primary agricultural credit society or primary co-operative agricultural and rural development bank).
Frequently asked questions
Can a business deduct a statutory due like GST or PF before it is actually paid?
Only if it is paid on or before the due date for filing the tax return for that year (under Section 263(1)). If paid later, the deduction is allowed only in the year of actual payment, per Section 37(1) and (3).
Does converting interest into a new loan or debenture count as payment?
No. Section 37(4) specifically states that converting interest payable to specified financial entities into a loan, advance, debenture or similar instrument that defers payment is not treated as "actually paid".
Are dues to small enterprises covered by this actual-payment rule?
Yes - Section 37(2)(g) covers amounts payable to a micro or small enterprise beyond the time limit specified in section 15 of the MSME Development Act, 2006, though the return-due-date relief in Section 37(3) does not apply to this particular item.
Related sections
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Get your statutory-dues deductions checked by our tax audit teamLast updated 9 September 2026