Actual-payment rule: deductions are taxable only when actually paid, with narrow early-payment carve-outs and contractual limits.
Section 37 makes specified business deductions allowable only in the tax year in which they are actually paid, regardless of accounting method or when liability arose. Enumerated categories include statutory levies, employer fund contributions, leave-in-lieu payments, amounts referred to section 32(a), interest on loans/advances/borrowings from specified financial entities, payments to Indian Railways, and late payments to micro and small enterprises; limited exceptions permit earlier-year deduction if paid by the return filing due date (excluding MSME payments), and conversion of interest into deferred instruments is not treated as payment.