Form 3CD Clause 26 for AY 2026-27: Section 43B Reconciliation Guide
Updated: Sep 28
Quick answer: For AY 2026-27, Form 3CD Clause 26 is the core tax-audit reconciliation for liabilities covered by Section 43B of the Income-tax Act, 1961. The auditor must separate older Section 43B liabilities from liabilities incurred during FY 2025-26, test when they were actually paid, and identify amounts that remain inadmissible. The ordinary return-due-date relaxation available for several Section 43B items does not operate in the same way for the MSME payment rule in Section 43B(h).
Update — 28 September 2026: CBDT changed the specified AY 2026–27 tax-audit report deadline from 30 September to 21 October 2026, and the related audited return deadline from 31 October to 21 November 2026. The separate Form 3CEB timeline is unchanged. Official Income Tax Department announcement.
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Why Clause 26 matters in the AY 2026-27 tax audit
Clause 26 is not merely a year-end outstanding-liability schedule. It links the books, payment dates and income-tax computation. A mismatch can affect the taxable income reported in the return, trigger reconciliation questions during assessment, and create inconsistencies between Form 3CD and the ITR computation.
The Income Tax Department has confirmed that FY 2025-26 / AY 2026-27 continues to use the existing Form 3CA or 3CB together with Form 3CD under the Income-tax Act, 1961, even though the Income Tax Act, 2025 applies from 1 April 2026. For the ordinary non-transfer-pricing case, the tax-audit report is due on 21 October 2026.
What does Section 43B do?
Section 43B overrides ordinary accrual accounting for specified deductions. Even where an expense is otherwise allowable, deduction is linked to actual payment for the categories listed in the section. These include statutory taxes and levies, employer contributions to employee welfare funds, employee bonus or commission, specified interest liabilities, leave encashment, amounts payable to Indian Railways for use of railway assets, and the separate MSME-payment rule in clause (h).
For several Section 43B items, payment made on or before the due date for filing the return under Section 139(1) can still preserve the deduction for that previous year. Section 43B(h) is materially different: the statutory return-due-date proviso does not extend to that clause, which is why MSME ageing must be reviewed independently.
How should Clause 26 be reconciled?
A reliable Clause 26 working paper should divide the review into two buckets rather than simply export every outstanding expense ledger.
1. Liabilities already existing on 1 April 2025
Identify Section 43B liabilities carried forward from earlier years that had not been allowed previously. Then trace whether each liability was actually paid during FY 2025-26. This is important because a prior-year disallowance can become deductible in the year of actual payment, subject to the applicable statutory conditions.
2. Liabilities incurred during FY 2025-26
For current-year liabilities, the tax-audit team should test the payment date against the relevant Section 43B rule. For the clauses that qualify for the Section 139(1) due-date concession, the reconciliation should separately identify amounts paid by the return due date and amounts still unpaid. This should tie directly to the computation of taxable income.
What should businesses reconcile before the auditor signs Form 3CD?
GST, customs duty, excise or other statutory tax/fee ledgers with challans and year-end outstanding balances.
Employer PF, superannuation, gratuity and other welfare-fund contributions with payment dates and statutory records.
Employee bonus or commission provisions, including whether the amount is genuinely payable for services rendered.
Interest payable to specified financial institutions, banks and other covered lenders, with lender-wise payment evidence.
Leave-encashment provisions and actual settlement dates.
Indian Railways usage charges, where relevant.
Prior-year Section 43B disallowances carried forward in the tax computation and the amounts actually paid during FY 2025-26.
MSME balances falling under Section 43B(h), reconciled separately with the vendor's micro/small-enterprise status and the MSMED Act payment timeline.
Section 43B(h): why Clause 22 and Clause 26 should not be reviewed in isolation
For AY 2026-27, MSME payments require a separate control because the Section 43B(h) disallowance is tied to the payment period under Section 15 of the MSMED Act. A payment after the MSMED Act deadline does not become allowable merely because it is made before the income-tax return due date. This is one of the most common reasons that a generic Section 43B checklist can produce a wrong tax result.
PGT & Associates has a separate detailed guide on Form 3CD Clause 22, Section 43B(h) and the 15/45-day MSME rule.
Example: how a Clause 26 adjustment flows into taxable income
Assume a company following the mercantile system books ₹12 lakh of a covered statutory liability during FY 2025-26. ₹8 lakh is paid before 31 March 2026 and the remaining ₹4 lakh is paid before the Section 139(1) return due date. If that liability falls within a Section 43B category eligible for the return-due-date concession, the full ₹12 lakh may be deductible for FY 2025-26, subject to the other statutory conditions. If the ₹4 lakh remains unpaid beyond the return due date, that portion ordinarily requires disallowance and can generally be considered when actually paid later.
That logic should not be mechanically applied to Section 43B(h). MSME dues require a separate Section 15 MSMED Act test.
Common Clause 26 errors
Using only the 31 March payable balance instead of reviewing liabilities paid after year-end but before the relevant tax deadline.
Failing to carry forward prior-year Section 43B disallowances in a recoverable schedule.
Treating every expense payable as a Section 43B item without mapping it to the statutory category.
Using the return due date as a universal cure, including for Section 43B(h) MSME payments.
Relying on ledger narration without challans, bank evidence or lender-wise payment support.
Reporting Form 3CD figures that do not tie back to the final ITR disallowance schedule.
A practical pre-filing Clause 26 checklist
Extract all potential Section 43B ledgers and tag each item to the relevant statutory clause.
Create separate columns for opening balance, current-year accrual, payment up to 31 March, post-year-end payment and closing balance.
Link every material payment to challan/bank support and the underlying liability.
Reconcile prior-year disallowances against the current year's deduction claim.
Run a separate MSME vendor ageing review for Section 43B(h).
Tie the final allowable/disallowable figures to the income-tax computation and ITR schedules before Form 3CD is uploaded.
Retain the reconciliation as part of the tax-audit file because Clause 26 is evidence-driven, not merely disclosure-driven.
How Clause 26 fits into the wider AY 2026-27 tax-audit review
For a wider pre-filing review, see Form 3CD Common Mistakes for AY 2026-27.
For filing timelines, see Tax Audit Due Date for AY 2026–27: report extended to 21 October.
Authoritative references
Income Tax Department: Section 43B — deductions on actual payment.
Income Tax Department: FY 2025-26 / AY 2026-27 tax-audit form and transition guidance.
Need a Form 3CD reconciliation review?
For businesses preparing for the AY 2026-27 tax-audit cycle, the highest-value work is usually not the final upload—it is resolving reconciliation breaks before the report is signed. PGT & Associates can assist with tax-audit readiness, Form 3CD reconciliation, Section 43B review and related compliance support.
Disclaimer
This article is for general professional information and does not constitute legal, tax or accounting advice for any specific facts. Statutory provisions, forms, portal validations and judicial interpretations should be checked for the taxpayer's circumstances before filing.
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