MSME delayed payment rule: 45 days, interest at 3x bank rate and Section 43B(h)

If you are a micro or small enterprise registered on Udyam, the law says your buyers must pay you within 45 days of accepting your goods or services (15 days if nothing is agreed in writing), and if they do not, they owe you interest at three times the RBI bank rate, compounded monthly. Since April 2024, buyers also lose the income tax deduction for any such bill left unpaid past the limit at their year end. This guide explains Sections 15 to 17 of the MSMED Act, Section 43B(h), the MSME Samadhaan process, and how to use all of it without losing customers.

What the MSMED Act actually says

The Micro, Small and Medium Enterprises Development Act, 2006 has a short chapter on delayed payments that gives registered micro and small enterprises the strongest collection tool any small business in India has. The key sections:

Section 15 requires a buyer who has received goods or services from a micro or small enterprise to make payment on or before the date agreed in writing between them. If there is no written agreement, payment must be made before the "appointed day". Even where there is a written agreement, the period cannot exceed 45 days from the day of acceptance or deemed acceptance.

Appointed day (Section 2(b)) is the day immediately after the expiry of 15 days from the day of acceptance or deemed acceptance. So with no agreement, the buyer has 15 days.

Day of acceptance is the day the goods are actually delivered or the service actually rendered. Deemed acceptance covers a buyer who receives the goods and raises no written objection within 15 days; after that, the goods are deemed accepted on the delivery date even if the buyer complains later.

Section 16 says that if the buyer fails to pay by the due date, the buyer is liable to pay compound interest with monthly rests at three times the bank rate notified by the Reserve Bank of India, from the appointed day or the agreed date, whichever applies. This applies whether or not the invoice or agreement says anything about interest.

Section 17 makes the buyer liable to pay the amount due together with that interest.

Section 18 lets either party refer a dispute to the Micro and Small Enterprises Facilitation Council (MSEFC) of the state, which first attempts conciliation and then arbitration, and is expected to decide within 90 days. Section 19 says a buyer can appeal an award only after depositing 75 percent of the amount. Section 23 makes the interest paid non-deductible for the buyer's income tax. Section 22 requires buyers who get their accounts audited to disclose outstanding dues to micro and small enterprises in their financial statements.

Note the coverage: micro and small enterprises only. Medium enterprises get no delayed-payment protection.

The two timelines at a glance

"Written agreement" includes a purchase order that states the credit period, an email exchange, or the payment terms on an invoice that the buyer has accepted. Keep whatever document sets the term.

Who counts as a micro or small enterprise

Classification is by investment in plant and machinery or equipment and by turnover, both tested together, as revised in 2025:

Registration is on udyamregistration.gov.in, is free, needs only Aadhaar, PAN and GSTIN (where applicable), and generates a Udyam Registration Number (URN) like UDYAM-KL-07-0012345. The benefits beyond delayed-payment protection are covered in /blog/msme-udyam-registration-benefits.

One important restriction: wholesale and retail traders were allowed to register on Udyam from July 2021, but the Ministry's office memorandum limited their benefits to priority sector lending. The delayed payment chapter is understood not to apply to trading enterprises, and the tax department follows the same reading for Section 43B(h). A manufacturer, a job worker, a service provider (including freelancers and agencies) is covered. Confirm with your CA if your business does both.

How the interest is calculated

Interest under Section 16 is three times the RBI bank rate, compounded with monthly rests. The bank rate moves with monetary policy, so check the current figure on rbi.org.in. For the example below, take an illustrative bank rate of 5.75 percent, which makes the MSMED rate 17.25 percent a year, or 1.4375 percent a month.

Worked example: a Ludhiana auto-component maker

Gurpreet runs a micro enterprise in Ludhiana making machined components. He supplies a Chandigarh assembler, delivering ₹5,00,000 of parts on 1 April 2026. There is no written credit term; the buyer's purchase order is silent. The buyer raises no objection.

• Day of acceptance: 1 April 2026.
• Appointed day: 17 April 2026 (day after 15 days expire).
• Buyer pays on 16 July 2026, about 90 days after the appointed day, or three monthly rests.

Interest at 1.4375 percent per month, compounded:

• After month 1: ₹5,00,000 × 1.014375 = ₹5,07,188
• After month 2: ₹5,07,188 × 1.014375 = ₹5,14,479
• After month 3: ₹5,14,479 × 1.014375 = ₹5,21,875

Interest due: about ₹21,875 on a ₹5,00,000 bill paid three months late. Had the buyer's PO stated 45 days, interest would run from 17 May instead and come to roughly ₹14,400 for two months. Either way, the buyer cannot deduct that interest for income tax under Section 23.

Gurpreet does not have to sue to claim this. He can simply add the interest to the statement of account and, if the buyer refuses, file on MSME Samadhaan.

Section 43B(h): why buyers now care

Until 2024, the MSMED interest rule existed but was rarely enforced because small suppliers did not want to fight their customers. The Finance Act 2023 changed the incentive by inserting clause (h) into Section 43B of the Income Tax Act, effective from assessment year 2024-25 (financial year 2023-24 onwards).

Section 43B(h) says that any sum payable by an assessee to a micro or small enterprise beyond the time limit in Section 15 of the MSMED Act is allowed as a deduction only in the year in which it is actually paid. The usual Section 43B proviso, which allows a deduction if payment is made before the due date of filing the return, does not apply to clause (h).

In plain words, for the buyer:

• Bill from an MSE paid within the Section 15 limit (15 or up to 45 days): deductible in the year of the expense as normal.
• Bill from an MSE that has crossed the limit and is still unpaid on 31 March: the expense is added back to taxable income for that year and allowed only in the year it is paid.
• Bill that has crossed the limit but is paid before 31 March: deductible in the year paid, which is the same year, so no practical effect apart from the MSMED interest.

Worked example for a buyer

A Jaipur handicrafts exporter (buyer) purchases ₹8,00,000 of packaging from a small enterprise on 10 March 2027 with a 30-day PO term. Due date: 9 April 2027. The exporter's year ends 31 March 2027, with the bill unpaid but not yet overdue. If it is paid by 9 April, the ₹8,00,000 stays deductible in FY 2026-27. If it is paid on 20 April, the ₹8,00,000 is disallowed in FY 2026-27 and allowed in FY 2027-28. At a 30 percent tax rate, that is ₹2,40,000 of extra tax paid a year early, plus MSMED interest to the supplier. This is why buyers' CAs now ask every supplier for their Udyam status before the March closing.

Buyers that are companies also have to file MSME Form 1 with the Ministry of Corporate Affairs every half year listing dues to micro and small enterprises outstanding beyond 45 days.

How to mention your Udyam number on invoices

The MSMED Act does not require you to print the Udyam number, but doing so removes every excuse. The buyer's accounts team cannot claim they did not know you were an MSE, and their auditor will flag your invoices for 43B(h) automatically. Put the following on every invoice, quotation and statement:

• A line under your business name: "Udyam Registration No. UDYAM-XX-00-0000000 (Micro Enterprise)".
• A payment terms line: "Payment due within 30 days of delivery. Interest under Section 16 of the MSMED Act, 2006 applies on delayed payment."
• Keep the credit period at or below 45 days. A 60-day term on the invoice is read as 45 days by the Act anyway, and a shorter term starts the interest clock sooner.

Also send buyers a one-time letter with your Udyam certificate attached, and ask them to update your vendor master. Many large buyers now have a "MSME vendor" flag that triggers payment within 45 days automatically. For the invoice fields themselves, see /blog/how-to-make-gst-invoice-mandatory-fields.

Filing on MSME Samadhaan, step by step

MSME Samadhaan (samadhaan.msme.gov.in) is the online route to the Facilitation Council. It is free to file.

1. Send a formal demand first. A statement of account with all invoices, delivery proof, and the interest calculation, with a deadline. Many buyers pay at this stage once they see the interest figure and the Samadhaan reference.
2. Log in on the portal using your Udyam Registration Number and the mobile number linked to it. You receive an OTP.
3. Fill the application. Buyer's name, address, PAN and GSTIN if known; the total principal claimed; and a line for each invoice with date, amount, and date of acceptance.
4. Upload documents. Invoices, purchase orders or work orders, delivery challans or proof of service, e-way bills if any, the buyer's acceptance or absence of objection, your reminders, and the interest calculation. PDF format, within the portal's size limits.
5. Submit and note the application number. The portal forwards the reference to the MSEFC of the state where you (the supplier) are located. The buyer is notified.
6. Conciliation. The Council calls both parties. Most matters settle here, often with the buyer paying the principal and the parties agreeing on interest.
7. Arbitration. If conciliation fails, the Council or an institution it refers to arbitrates. The award covers principal and interest under Section 16. The Council is expected to conclude within 90 days, though in practice it varies by state.
8. Enforcement. The award is enforceable like an arbitral award. A buyer who wants to challenge it must first deposit 75 percent under Section 19.

Keep filing monthly statements of account to the buyer during the process. Silence from the buyer in the face of a clear statement helps your case. The reminder sequence in /blog/payment-reminder-messages-that-work is designed to build exactly this record.

Using the rule without losing customers

The law is a lever, not a weapon. Most small suppliers do not want to drag their biggest customer to a council. Practical ways to use it:

• Print the Udyam number and terms on every document. Let the buyer's own auditor do the persuading.
• Mention 43B(h) in the March reminder. "As you are aware, dues to MSEs beyond 45 days at 31 March are disallowed under Section 43B(h). Your account shows ₹X due since [date]." Buyers pay MSEs in the last week of March for exactly this reason.
• Offer to waive interest for prompt settlement. The interest is your right; waiving it in exchange for payment this week is a fair trade and keeps the relationship.
• Reserve Samadhaan for buyers who have stopped engaging. Once a customer is no longer a customer, there is nothing to lose.

Common mistakes

• Not registering on Udyam, then discovering you have no standing to claim interest.
• Agreeing to 60 or 90 day terms in writing and assuming that binds you; it does not, the Act caps at 45.
• No proof of delivery date, so the day of acceptance cannot be established.
• Waiting years to file; there is no fixed limitation in the Act for the reference, but stale claims are harder to prove and buyers disappear.
• Buyers: treating Section 43B(h) like the rest of 43B and paying in April before filing the return; the proviso does not apply.
• Buyers: not asking suppliers for Udyam status and getting surprised at audit.
• Traders assuming they are covered for delayed payments; the benefits for trading enterprises are limited to priority sector lending.

How VyaparKit helps

Add your Udyam number and MSMED payment terms to your business profile once and they print on every GST invoice and quotation. The customer ledger records the invoice and delivery dates you will need to establish the day of acceptance, and the outstanding statement produces the ageing statement of account that both the buyer's auditor and the Facilitation Council will want to see. The payment reminder tool covers the reminder sequence; the interest calculation itself is a short spreadsheet using the current RBI bank rate.

Next steps

• Register on Udyam today if you are a manufacturer or service provider and have not done so.
• Add the Udyam number and a Section 16 interest line to your invoice template.
• Bring every customer's written credit term down to 45 days or less.
• Send March statements to buyers with anything over 45 days and mention Section 43B(h).
• Keep delivery proof with every invoice so the day of acceptance is never in doubt.