How MSMEs are taxed under the Income-tax Act, 1961 in 2026 — concessional rates, presumptive schemes, Section 43B(h) and deductions every founder should plan around.
MSMEs sit at the centre of India's tax policy. Union Budget 2026 retained the concessional 25% corporate tax rate for MSME companies meeting the turnover threshold and tightened the Section 43B(h) regime that disallows expenses where MSME vendors are paid late. For FY 2026-27, every MSME founder should understand exactly how the Income-tax Act applies to them.
Who is an MSME for tax purposes
The MSMED Act's revised classification (composite turnover and investment criteria) determines whether a business is a micro, small or medium enterprise. Once an Udyam registration is held, the business qualifies for the MSME-specific tax provisions discussed below — most importantly Section 43B(h) and the presumptive schemes.
Concessional corporate tax rate
Domestic companies with total turnover or gross receipts not exceeding the prevailing CBDT-notified limit in the relevant preceding year continue to be taxed at 25% plus surcharge and cess. Manufacturing companies incorporated after 1 October 2019 and opting in under Section 115BAB pay 15% subject to conditions. Both rates remain unchanged for AY 2027-28.
Presumptive taxation under Sections 44AD and 44ADA
- Section 44AD covers eligible resident businesses with turnover up to ₹3 crore (where cash receipts are below 5%); presumptive income is 6% on digital receipts and 8% on cash.
- Section 44ADA covers specified professionals with gross receipts up to ₹75 lakh (where cash receipts are below 5%); presumptive income is 50% of receipts.
- Section 44AE applies to small transporters with up to 10 goods vehicles.
- Opting out within five years restricts re-entry for the next five years — a one-way valve worth planning carefully.
Section 43B(h) — the MSME payment rule
Section 43B(h), in force from AY 2024-25 and tightened further in Union Budget 2026, disallows any expense to a registered micro or small enterprise if payment is not made within 15 days (no written agreement) or 45 days (written agreement) of acceptance of goods/services. Disallowance reverses only in the year of actual payment. This single section has reshaped working-capital practices for buyers and is a major cash-flow positive for MSME suppliers.
Deductions and incentives MSMEs commonly use
- Section 32 additional depreciation on new plant & machinery for manufacturing units.
- Section 35 weighted deduction on in-house R&D for eligible activities.
- Section 80JJAA deduction on incremental employee cost for new hires earning up to a prescribed threshold.
- Start-up tax holiday under Section 80-IAC for DPIIT-recognised eligible startups.
- Lower TDS rate on receipts certified under Section 197.
Compliance calendar essentials
Tax audit under Section 44AB applies if turnover exceeds ₹1 crore (₹10 crore where digital receipts and payments are above 95%) or professional receipts exceed ₹50 lakh. Advance tax in four instalments, monthly TDS, quarterly TDS returns, GST returns aligned with the new regime defaults, and the annual income-tax return complete the cycle.
TDS, advance tax and refunds
MSMEs are subject to the standard TDS architecture — Sections 192 (salary), 194C (contractors), 194J (professional fees), 194Q (purchase of goods above ₹50 lakh) and 194O (e-commerce participants). Mismatch between TDS credits in 26AS / AIS and the books is the single largest cause of refund delays. Reconcile TDS quarterly, file Form 26QB/26QC where applicable, and chase deductors for Form 16A within prescribed timelines.
Audit and books — when they apply
- Section 44AA — books of account compulsory if income exceeds ₹2.5 lakh or turnover exceeds ₹25 lakh in any of the three preceding years (individual/HUF) or ₹1.5 lakh / ₹10 lakh for others.
- Section 44AB — tax audit by a CA if turnover exceeds ₹1 crore (₹10 crore where digital payments > 95%) or professional receipts > ₹50 lakh.
- Section 92E transfer pricing — applies to international transactions and specified domestic transactions above prescribed thresholds.
- Section 285BA — Specified Financial Transactions reporting via SFT statements.
Practical AP-process design for Section 43B(h)
To stay compliant with Section 43B(h), most well-run MSMEs and their buyers have rebuilt their accounts payable process around three principles. First, capture vendor Udyam registration at onboarding and tag each invoice as 'MSE — micro/small' or 'other'. Second, run a daily ageing report on MSE invoices specifically, with the 15-day and 45-day cut-offs highlighted. Third, escalate stalled invoices automatically before the 45-day deadline so that no disallowance is triggered. The fourth, sometimes overlooked, principle is to retain the written agreement evidencing the 45-day term — without it, the default is 15 days.
Conclusion
MSMEs enjoy a genuinely favourable tax architecture in 2026 — low rates, presumptive simplicity, accelerated depreciation, R&D and hiring incentives. But Section 43B(h) means the new rule is non-negotiable: pay your MSME vendors on time, or watch your taxable profit increase. A clean Udyam-tagged AP process is the single highest-ROI tax compliance you can install this year.
