MSMED Act Interest on Late Payments: Your Right to 3x Bank Rate

Most small suppliers know they are entitled to "some interest" on late payments. Few know how strong the provision actually is: compound interest, with monthly rests, at three times the RBI bank rate — and the buyer cannot even deduct that interest for income tax. Here is how Sections 15 and 16 of the MSMED Act, 2006 work, with real numbers.

Section 15 says the buyer must pay a micro or small enterprise on or before the date agreed in writing — and that agreed period cannot exceed 45 days from the day of acceptance or deemed acceptance of the goods or services. If there is no written agreement at all, payment is due within 15 days.

Acceptance has its own clock: if the buyer does not raise a written objection within 15 days of delivery, acceptance is deemed to have happened on the day of actual delivery. A buyer cannot stall the 45 days by simply staying silent about "quality checks".

If the buyer fails to pay within the Section 15 period, Section 16 makes them liable to pay compound interest with monthly rests, from the appointed day (the day after the due period ends), at three times the bank rate notified by the Reserve Bank of India. Three things make this unusually strong:

• It applies automatically, "notwithstanding anything contained in any agreement" — a contract clause waiving it does not hold.

• It compounds monthly, so it grows faster than simple interest.

• Under Section 23 of the Act, the buyer cannot claim this interest as a deductible expense for income tax. It is pure post-tax pain for them.

The RBI bank rate moves with monetary policy, so treat this as an illustration. Assume a bank rate of 6 percent per annum. Three times that is 18 percent per annum, which with monthly rests means 1.5 percent per month, compounding.

On an overdue invoice of ₹1,00,000:

• After 3 months overdue: about ₹4,568 of interest (₹1,00,000 × 1.015 to the power 3, minus principal).

• After 6 months: about ₹9,344.

• After 12 months: about ₹19,562 — nearly a fifth of the invoice value.

Compare that with what the same buyer pays their bank on working capital, and you see why the statute was written this way: it is designed to make delaying a small supplier the most expensive credit line the buyer has.

You do not need to file a court case to claim this. Under Section 18, a micro or small enterprise can file a reference online on the MSME Samadhaan portal (samadhaan.msme.gov.in) against any buyer — including large companies and government departments. The reference goes to the Micro and Small Enterprises Facilitation Council (MSEFC) of the relevant state, which first attempts conciliation and then arbitration. The Act intends decisions within 90 days, though real timelines vary by state council.

Two features tilt the field toward you:

• You need a Udyam registration to file, and the filing itself is simple — invoice copies, delivery proof, and the amount claimed.

• If the buyer wants to appeal a Council award, they must first deposit 75 percent of the awarded amount. That deposit requirement settles many cases quickly.

• The relationship cost is real. Filing a Samadhaan reference against a client usually ends the commercial relationship. Use it for buyers you have already decided to stop working with, or where the amount justifies it.

• Timelines are uneven. Some state councils clear references in months; others take much longer. Ask peers in your trade association about your state's council before relying on it.

• The mention is often worth more than the filing. A polite written line — "as a Udyam-registered enterprise we are entitled to interest under Section 16 of the MSMED Act on dues beyond 45 days; we would much rather resolve this informally" — resolves many cases at zero cost. Keep records: invoices, delivery challans, acceptance dates, and every reminder, so the option stays open.

• Interest claims work best paired with Section 43B(h) awareness: the buyer's accountant already dislikes ageing MSME dues; statutory interest gives them a second reason to prioritise you.

This article is general information, not legal advice. Bank rate values change and council procedures differ by state — verify current figures and consult a professional before filing.