MSME Payment Rule: 15/45-Day Deadlines, Interest and Tax

A purchase order may say “60 days credit” or “90 days credit”. That does not necessarily mean the buyer legally has 60 or 90 days to pay a qualifying micro or small enterprise.

Sections 15 and 16 of the Micro, Small and Medium Enterprises Development Act, 2006 (the MSMED Act) create a separate statutory framework for delayed payments to qualifying micro and small suppliers. The payment deadline can also affect the buyer's income-tax deduction. The first step, however, is to establish whether the supplier and transaction are covered.

Which suppliers are covered?

Businesses should maintain reliable information about suppliers claiming micro or small enterprise status, including their current classification, Udyam details, nature of activity and relevant registration records. The MSME limits effective from 1 April 2025 are:

The delayed-payment provisions in Chapter V of the MSMED Act concern micro and small enterprises, not medium enterprises. They apply to suppliers registered as micro or small enterprises carrying on manufacturing or services. Suppliers registered only as traders are generally treated as outside the rule.

Supplier eligibility can involve factual and legal questions, particularly around registration dates and the nature of the supplier's activity. Those questions should be checked, not assumed only because an invoice carries the words “MSME registered”.

How long does the buyer have to pay?

Section 15 distinguishes between transactions with and without a written agreement.

Where there is a written agreement

Payment should be made on or before the date agreed between the buyer and supplier. But the agreed period cannot exceed 45 days from the day of acceptance or deemed acceptance. A contractual 60-day or 90-day term therefore cannot extend the statutory ceiling beyond 45 days.

Where there is no written agreement

Payment must be made before the appointed day, which the Act ties to the day of acceptance or deemed acceptance. In effect, this is the 15-day limit.

Why the invoice date alone can be misleading

The Act works from the day of acceptance or deemed acceptance, not simply from whatever date appears on the supplier's invoice. Acceptance is the day of delivery, unless the buyer raises a written objection about the goods or services within 15 days. In that case, it is the day the objection is resolved.

For that reason, a reliable register of payments to micro and small suppliers should keep the delivery or service-completion date, written objections and how they were resolved, and not only the invoice date and payment date.

What happens when payment is late?

Where payment is not made as required by Section 15, the buyer becomes liable for compound interest with monthly rests (interest is added to the amount due every month) at three times the bank rate notified by the RBI.

Where no written agreement governs the period, the interest mechanism runs from the appointed day. Where a written payment date applies, it runs from the date immediately following that agreed date, subject to Section 15's statutory ceiling. Because the RBI bank rate can change, interest worked out at today's rate is only an estimate where the rate changed during the delay.

The interest itself is not tax-deductible

The MSMED Act separately addresses the tax treatment of the statutory interest. Section 23 states that interest payable or paid by the buyer under the Act is not allowed as a deduction in computing income. That should be distinguished from the treatment of the underlying purchase or expense.

What happens to the underlying expense for income-tax purposes?

For financial year (FY) 2025-26, which is assessment year (AY) 2026-27, Section 43B(h) of the Income-tax Act, 1961 applies. Section 43B(h) provides that a sum payable to a micro or small enterprise beyond the time allowed under Section 15 of the MSMED Act is deductible on actual payment.

Unlike most other items covered by Section 43B, the usual relief for payment made before the income-tax return due date is expressly unavailable for clause (h). From tax year 2026-27, that is from 1 April 2026, the corresponding provision appears in Section 37(2)(g) of the Income-tax Act, 2025. The Income Tax Department's own MSME guide maps Section 43B(h) to Section 37(2)(g).

The core practical issue therefore remains the same: once the statutory MSMED payment period is breached, the timing of actual payment becomes important for the deduction.

Example 1: paid late, but before year-end

Assume a qualifying expense is otherwise deductible. The applicable MSMED payment deadline expires during March, but the buyer pays the supplier later in March before the financial year ends. The payment may still be late for MSMED Act purposes, and statutory interest may arise.

However, because actual payment occurred within that same financial year, the deduction does not necessarily move into a later year solely because the statutory payment period was breached. The payment-law consequence and the tax-year consequence should therefore be shown separately.

Example 2: payment crosses into the next year

Now assume the statutory deadline has already expired before 31 March, the amount remains unpaid at year-end and payment is finally made in April. Subject to the other conditions of the income-tax provision, the deduction moves to the year in which actual payment is made. Paying in April, even before the due date for the return, does not bring the deduction back into the earlier year.

Example 3: the invoice is still within its MSMED deadline on 31 March

Suppose goods are accepted on 20 March under a valid written payment period of 45 days. On 31 March, the statutory payment period has not yet expired. That invoice should not automatically be treated as already disallowed only because it is outstanding at year-end. Its final treatment depends on whether payment is later made within the Section 15 period that applies.

This is why “outstanding on 31 March” and “overdue under the MSMED Act” are not the same thing.

What should a business track?

A useful control over payments to micro and small suppliers should connect four sets of information:

Supplier status: classification and supporting registration details.

Acceptance: delivery or service completion, written objection and resolution where applicable.

Payment: statutory deadline, amount outstanding and actual payment date.

Tax: whether the payment period was breached and the year in which actual payment occurred.

For companies, Form MSME-1 (the half-yearly return of amounts due to micro and small enterprises) and financial-statement disclosure requirements should be assessed separately because their triggers are not identical to the income-tax disallowance test.

A note on the 2026 MSMED Amendment Act

The Micro, Small and Medium Enterprises Development (Amendment) Act, 2026 received Presidential assent on 13 August 2026.

S.O. 5575(E), dated 12 October 2026, brings amendment sections 2–7, 11 and 13–17 into force from 15 October 2026. Amendment section 12, which changes Facilitation Council composition, is scheduled for 15 December 2026. Sections 8–10 are not commenced by this notification.

The commenced changes cover classification and registration, TReDS settlement for Central Public Sector Enterprises and notified entities, Council establishment, disclosures and penalties. They do not replace the Section 15 payment periods or Section 16 interest calculation used here. The checker’s 15/45-day and monthly-compounding formulas are therefore unchanged; it does not assess the separate TReDS obligations.

In practice

The question for each payment to a micro or small supplier is not simply:

“Is the invoice older than 45 days?”

A better sequence is:

Supplier eligibility → Acceptance date → Written agreement → Statutory deadline → Actual payment → Interest → Deduction year.

Work through each invoice in that order. The MSME Payment Checker follows the same sequence.

Before relying on this article: it follows Sections 15, 16 and 23 of the MSMED Act, Section 43B(h) of the Income-tax Act, 1961 and Section 37(2)(g) of the Income-tax Act, 2025. Whether a supplier is covered, and the date of acceptance, depend on the facts of each invoice.

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