Late payment is the most common cash-flow problem MSMEs bring to us. The MSME Ministry's 2025-26 annual report quotes the Economic Survey's estimate that about ₹8.1 lakh crore is locked in delayed payments to MSMEs. The law gives micro and small suppliers three strong tools: a hard payment deadline, a penal interest rate, and a tax rule that makes paying late expensive for the buyer.
Who is protected
The protections in sections 15–24 of the MSMED Act, 2006 are for a supplier that is a micro or small enterprise. Medium enterprises are not covered: in 2023 the Calcutta High Court held that a buyer does not owe interest at three times the Bank Rate to a medium-enterprise supplier. Keep your Udyam registration current, because buyers and Facilitation Councils will ask for it.
The 45-day rule (section 15)
The buyer must pay:
- on or before the date agreed in writing, and that period can never exceed 45 days from the day of acceptance or deemed acceptance; or
- where nothing is agreed in writing, before the appointed day, which is the day after 15 days from acceptance.
Acceptance is the day goods are delivered or services rendered. If the buyer objects in writing within 15 days, it is the day the supplier removes the objection; if there is no written objection within 15 days, the delivery day counts as deemed acceptance. A purchase order that says "payment in 90 days" does not extend the limit: the law caps it at 45.
Interest on late payment (section 16)
If the buyer misses the deadline, it owes compound interest with monthly rests at three times the Bank Rate notified by RBI, from the day after the due date, notwithstanding anything in the contract. Section 17 makes the buyer liable for the amount with that interest.
| Bank Rate | Interest rate (3×) | Period |
|---|---|---|
| 5.50% | 16.50% a year | 5 December 2025 to 6 October 2026 |
| 5.75% | 17.25% a year | from 7 October 2026 |
The Bank Rate moved to 5.75% when the RBI raised the repo rate to 5.50% on 7 October 2026 (see what the rate hike means). Where a delay spans a change, the Calcutta High Court held in V.K. Patel & Co v. Simplex Infrastructure (2024) that each monthly rest uses the rate prevailing at the time.
Worked example
A micro-enterprise contractor's ₹10,00,000 bill is accepted on 1 August 2026 with 45 days' credit, so the last day to pay is 15 September 2026. It is still unpaid on 15 March 2027.
- Interest runs from 16 September 2026, with monthly rests.
- The first month is at 16.50% and the next five at 17.25%.
- Interest due by 15 March 2027: ₹88,738, so the claim is ₹10,88,738.
- If there had been no written credit period, payment would have been due within 15 days and the interest by the same date would be ₹1,03,150.
Our MSME delayed payment interest calculator does this invoice by invoice, with part payments and month-by-month working you can attach to a claim.
The buyer's tax cost: section 43B(h), now section 37(2)(g)
The Finance Act, 2023 inserted section 43B(h) into the Income-tax Act, 1961: any sum payable to a micro or small enterprise beyond the section 15 time limit is deductible only when actually paid.
The Income-tax Act, 2025 replaced the 1961 Act from 1 April 2026. The same rule is now section 37(2)(g), and the Finance Ministry confirmed the mapping in a Rajya Sabha answer on 21 July 2026. Two points matter:
- No grace period. Section 37(3) lets most items in this section be deducted for a year if paid by the return due date, but expressly excludes clause (g). An MSE bill overdue on 31 March is disallowed for that year and allowed in the year it is paid.
- Which law applies. For the year ended 31 March 2026, section 43B(h) of the 1961 Act applies. For tax year 2026-27, ending 31 March 2027, section 37(2)(g) applies.
On top of that, section 23 of the MSMED Act says the section 16 interest itself is never deductible, and section 22 requires a buyer whose accounts are audited to disclose unpaid principal and interest to micro and small suppliers.
In the example above, if the ₹10,00,000 bill is still unpaid on 31 March 2027, the buyer loses that deduction for tax year 2026-27 and pays tax on it a year early, as well as owing interest it cannot deduct.
How a supplier recovers
- Send a reminder quoting sections 15 and 16 and your Udyam number, with the interest computed to date.
- Refer the dispute to the Micro and Small Enterprises Facilitation Council (MSEFC) of your state (section 18). It can hear a claim against a buyer located anywhere in India.
- File online. The MSME Ministry says all new delayed-payment cases are filed on the MSME ODR portal from 15 October 2025, which is being integrated with the older MSME Samadhaan portal. The ODR process starts with an attempt at amicable settlement before conciliation and arbitration.
- Conciliation, then arbitration. If conciliation fails, the Council arbitrates or refers the case to an institution. The Act says a reference should be decided within 90 days.
- Award protection. A buyer that applies to a court to set aside an award must first deposit 75% of it (section 19).
What the 2026 amendment changes
Parliament passed the MSMED (Amendment) Bill, 2026 in August 2026. According to commentary on notification S.O. 5575(E), several provisions came into force on 15 October 2026, including a new duty on central public sector enterprises to settle MSME invoices through TReDS, a new basis for classifying MSMEs, and graded penalties. The provisions on mediation timelines and on paying at least 50% of an award to the supplier where a challenge has been pending for over six months had not been notified as of 21 October 2026. Sections 15 and 16 are unchanged, so the 45-day rule and the interest rate stay as above.
What buyers should do
- Map which vendors are micro or small (ask for Udyam certificates) and flag them in your payables system.
- Agree credit periods of 45 days or less in writing; anything longer is capped anyway.
- Clear MSE dues before 31 March to protect the deduction.
- If cash is tight, fund payables through a working capital limit or settle invoices on TReDS rather than paying 17.25% compound interest that is not tax-deductible.
What suppliers should do
- Put the credit period (45 days or less) in writing on every PO or contract, and record delivery and acceptance dates.
- Raise objections and their resolution in writing, since they move the acceptance date.
- Track overdue invoices monthly and claim interest at the rate prevailing each month.
- While you pursue the buyer, bridge the gap: bill discounting, TReDS or a cash credit limit can unlock working capital. Our guide to working capital for contractors explains the options, and our bank guarantee guide shows how to keep security costs down on new contracts.
How Biz Corp Solutions helps
While your claim runs its course, we help MSMEs arrange cash credit, bill discounting and TReDS finance against receivables, and review whether existing limits match their order book, through banks, NBFCs and financial institutions. See our working capital and project funding services.
This article is based on the MSMED Act, the Income-tax Act, 2025, RBI announcements, MSME Ministry publications and commentary up to 21 October 2026. It is general information, not legal or tax advice. Whether the Act applies to your contract, and what is awarded, is decided by the Facilitation Council, a tribunal or a court.