What is the Direct Tax Code 2025 and when did it come into effect?

The Direct Tax Code 2025 (Income Tax Act 2025) replaced the Income Tax Act 1961 from April 1, 2026. It simplifies the entire direct tax framework, renumbers sections, removes redundancies, and modernizes taxation for India.

Is the Income Tax Act 1961 still valid after April 2026?

The Income Tax Act 1961 was repealed under Section 536 of the new Act from April 1, 2026. However, all assessments, appeals, and proceedings for periods before April 1, 2026 continue under the old ITA 1961 rules.

What is the new section number for Section 80C in Income Tax Act 2025?

Section 80C of the ITA 1961 maps to Section 123 of the Direct Tax Code 2025. Deductions for LIC premiums, PPF, ELSS, EPF, and home loan principal repayment continue under the new act.

What is the new section for TDS on professional fees (194J)?

Section 194J (TDS on professional and technical services) of the old Income Tax Act 1961 has been renumbered in the Direct Tax Code 2025. Use our free converter at ita1961to2025.in to find the exact new section number instantly.

How do I convert old income tax section numbers to new 2025 numbers?

Visit ita1961to2025.in and use the free section search tool. Type any old ITA 1961 section number (e.g., 80C, 194J, 139) and instantly see the new DTC 2025 equivalent, its status, and key changes.

Is the ITA 1961 to 2025 mapping tool free for CAs and tax professionals?

Yes, completely free. The section mapper, comparison cheat sheet, PDF download, and Tax Academy blog are all free for Chartered Accountants, tax lawyers, law students, and taxpayers.

Which sections were completely deleted in the new Income Tax Act 2025?

Several redundant and overlapping sections from ITA 1961 were not carried into DTC 2025. Use our free converter — each section is marked as Retained, Modified, or Deleted so you can quickly check any section's status.

Can I download the ITA 1961 to DTC 2025 comparison as a PDF?

Yes! Visit the Comparison page at ita1961to2025.in/comparison to download a free cheat sheet PDF showing side-by-side mapping of key ITA 1961 sections to their DTC 2025 equivalents.

What is the Section 43B(h) equivalent in the Direct Tax Code 2025?

The Direct Tax Code (DTC) 2025 is expected to retain the core principle of Section 43B(h), which requires that deductions for payments to Micro and Small Enterprises are only allowed in the year of actual payment if delayed beyond the MSMED Act timelines (15/45 days).

How do I identify a Micro or Small Enterprise for tax purposes?

You must obtain a valid Udyam Registration Certificate from your vendor. This certificate is the official proof of their status as a registered Micro, Small, or Medium Enterprise. The tax provision specifically applies only to Micro and Small Enterprises.

What happens if I delay payment to an MSME vendor under the new tax code?

If you pay a registered Micro or Small Enterprise beyond the statutory 45 or 15-day limit, you will not be able to claim that expense as a tax deduction in the financial year it was incurred. The deduction will be deferred to the financial year in which you actually make the payment, leading to a higher taxable income in the current year.

DTC 2025 & TallyPrime: Guide to MSME Payment Tax Ledgers

Key Takeaways

Shift to Payment-Basis Deduction: The Direct Tax Code (DTC) 2025 is expected to carry forward the principle of Section 43B(h) from the Income Tax Act, 1961. This means that expenses related to payments to registered Micro and Small Enterprises (MSEs) will be deductible only in the year the payment is actually made, not when the liability is accrued, if paid beyond the statutory due dates.
Strict Adherence to MSMED Act Timelines: Compliance hinges on the payment timelines defined in the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006. Payments to MSEs must be made within 45 days if a written agreement exists, or within 15 days if there is no agreement.
Mandatory Ledger Segregation: Businesses must meticulously identify and segregate registered Micro and Small Enterprise creditors from other creditors in their accounting systems, like TallyPrime. This requires creating specific ledger groups and obtaining Udyam Registration Certificates from all applicable vendors to ensure correct classification and compliance.
Enhanced Audit Scrutiny: Tax audit reports under the new regime will demand detailed disclosure of payments to MSEs, including both timely and delayed payments. This increases the compliance burden and necessitates robust internal tracking and reporting mechanisms within ERP systems.

PART 1: EXECUTIVE SUMMARY

(Target: 200 Words. Clear overview of the tax change.)

This guide provides a detailed compliance framework for corporations transitioning from the Income Tax Act, 1961, to the new Direct Tax Code (DTC) 2025, which is anticipated to take effect from April 1, 2026. The focus is on the continuity of provisions equivalent to Section 43B(h), which governs the deductibility of payments made to Micro and Small Enterprises (MSEs).

The Old Law (1961): Section 43B(h), introduced by the Finance Act 2023, stipulated that any sum payable to a registered Micro or Small Enterprise would be allowed as a deduction only on an actual payment basis if the payment was delayed beyond the time limits prescribed in the MSMED Act, 2006. This shifted the deduction from the year of accrual to the year of actual payment, impacting the taxable income of the buyer.
The New Law (2025): The DTC 2025 aims to simplify and streamline tax laws. While simplifying many areas, it is expected to retain the core principle of Section 43B(h) to continue protecting the financial health and cash flow of MSEs. The fundamental change is not the rule itself, but its integration into a new, consolidated legal framework, which will demand updated reporting and compliance mechanisms.
Who is Impacted: This transition impacts all entities, including companies, LLPs, and partnership firms, that purchase goods or services from Udyam-registered Micro and Small Enterprises. Financial controllers, tax heads, and compliance officers are directly responsible for implementing the necessary changes in their accounting and ERP systems to avoid disallowance of expenditure and potential penalties.

PART 2: DETAILED TAX ANALYSIS

1. Background & Corporate Impact

The introduction of Section 43B(h) into the Income Tax Act, 1961, was a pivotal measure to enforce payment discipline and ensure liquidity for the MSME sector. Its core function is to disallow the deduction of an expense for payments due to Micro and Small Enterprises (MSEs) in the financial year of accrual if the payment is not made within the timelines stipulated by the MSMED Act, 2006. The deduction is then deferred to the year in which the payment is actually made. This provision directly links a company's tax liability to its payment conduct with its smallest vendors.

The transition to the Direct Tax Code (DTC) 2025 is part of a broader tax reform agenda aimed at simplifying the tax structure and aligning it with global standards. While the DTC seeks to reduce complexities, the underlying policy objective of protecting MSEs is expected to remain a priority. Therefore, corporations should anticipate that a provision equivalent to Section 43B(h) will be a feature of the new code. The corporate impact remains significant:

Increased Taxable Income: Failure to pay MSEs on time will lead to a temporary disallowance of the expense, artificially inflating profits and increasing the tax outgo for that year.
Working Capital Mismanagement: The increased tax liability due to disallowed expenses can strain a company's working capital.
Intensified Compliance Burden: Companies must implement rigorous systems to identify MSE vendors, track payment due dates, and ensure timely settlement to avoid adverse tax consequences.

2. 1961 Act vs 2025 Direct Tax Code

A comparative analysis highlights the continuity of the core principle while anticipating changes in the administrative and reporting framework.

Feature	Income Tax Act, 1961 (Section 43B(h))	Direct Tax Code 2025 (Anticipated Provisions)
Core Principle	Deduction for payments to MSEs allowed on a payment basis if timelines under MSMED Act are breached.	The core principle is expected to be retained to support the MSME sector's financial stability.
Applicability	Applies to payments to Udyam-registered Micro and Small Enterprises only (Medium Enterprises are excluded).	Applicability is expected to remain for Micro and Small Enterprises. Clearer definitions and classifications may be provided.
Payment Timelines	Governed by Section 15 of the MSMED Act: 15 days (no agreement) or 45 days (with written agreement).	These timelines, derived from the MSMED Act, will continue to be the benchmark for compliance.
Disallowance Nature	The expense is disallowed for the financial year but can be claimed in the year of actual payment.	The mechanism of deferring the deduction is expected to be carried over into the new code.
Legal Framework	Integrated as a clause within Section 43B, which covers several other expenses allowed on a payment basis.	The provision will be part of a newly structured, consolidated code, potentially under a chapter dedicated to business expenditure rules.
Reporting	Disclosures required in the Tax Audit Report (Form 3CD), specifically under Clause 22, which has seen increased scrutiny.	Reporting requirements are likely to be more stringent and possibly integrated with digital compliance systems for real-time tracking.

3. Audit & ERP Reporting Requirements

Under the DTC 2025, audit and ERP reporting for MSE payments will become more critical. The focus will shift from post-facto reporting to proactive compliance management embedded within the company's financial systems.

Audit Requirements:

Vendor Master Validation: Auditors will require evidence that the company has a robust process for identifying and verifying the MSME status of its vendors. This includes obtaining and archiving Udyam Registration Certificates annually.
Detailed Transaction Reporting: Tax audit reports will likely require a granular breakdown of all transactions with registered MSEs, bifurcated into payments made within the due date and those delayed.
Interest on Delayed Payments: Auditors will also verify compliance with Section 16 of the MSMED Act, which mandates payment of compound interest on delayed payments. This interest is not a deductible expense.

ERP (TallyPrime) Configuration: To meet these requirements, configuring TallyPrime or other ERP systems effectively is non-negotiable.

Ledger Grouping: Create a specific group under "Sundry Creditors" named "Creditors - Micro & Small Enterprises". This ensures immediate segregation.
Vendor Master Fields: Add a custom field in the party ledger master to capture the vendor's Udyam Registration Number and classify them as "Micro," "Small," or "Other."
Due Date Configuration: Utilize Tally's credit period settings in the party ledger master to reflect the 15 or 45-day limit as per the MSMED Act. This will enable accurate aging reports.
Custom Reports: Configure reports to specifically track "Overdue Payables to MSEs" as of the last day of each financial quarter and, critically, as of March 31st. TallyPrime's filtering capabilities can be used to generate a list of bills for which deductions may be disallowed.

4. Financial Controller's Action Plan 2026

With the DTC 2025 effective from FY 2026-27, Financial Controllers must initiate a structured action plan immediately.

Quarter	Action Items	Key Objective
Q1 2026 (Apr-Jun)	Vendor Re-Classification Drive: Circulate a formal request to all vendors for their latest Udyam Registration Certificate. Update the ERP vendor master based on the responses.	To create a clean and verified master list of all MSE suppliers before the new law takes effect.
Q2 2026 (Jul-Sep)	ERP System Configuration & Testing: Implement the necessary changes in TallyPrime (ledger groups, custom fields, reports). Run a trial for a month to ensure reports are generated accurately.	To ensure the accounting system is fully capable of tracking and reporting MSE payables as per the new compliance needs.
Q3 2026 (Oct-Dec)	Internal Training & Process Documentation: Train accounts payable, procurement, and internal audit teams on the new law and internal processes. Finalize and circulate a Standard Operating Procedure (SOP) for MSE vendor onboarding and payment processing.	To embed the compliance mindset across departments and ensure consistent application of the new rules.
Q4 2026 (Jan-Mar)	Pre-emptive Audit & Review: Conduct a pre-emptive internal review of all MSE payables to identify and clear any potential overdues before the March 31, 2027, year-end.	To minimize the disallowance amount for the first year under the DTC 2025 and ensure a smooth year-end closing.

5. Final Advisory

The transition to the Direct Tax Code 2025, while aimed at simplification, elevates the importance of process-driven compliance, particularly concerning payments to Micro and Small Enterprises. The financial and operational risks associated with non-compliance are substantial. A proactive approach, centered on robust vendor management, accurate ERP configuration, and cross-departmental awareness, is the only way to navigate this change successfully. Corporate restructuring activities must also factor in these compliance requirements, as acquiring new businesses will involve inheriting their vendor liabilities and compliance history. Our team advises an immediate review of all vendor contracts and payment cycles to align them with the stringent requirements that will define the new tax landscape.

💡 Corporate Tax Tip: Ensure your business is fully compliant with the new Direct Tax Code 2025 to avoid hefty corporate penalties.