Under Section 16 of the MSMED Act, a buyer who pays a micro or small enterprise late must pay compound interest, with monthly rests, at three times the bank rate notified by the Reserve Bank of India, from the day the payment became due. This applies whatever the contract says. For example, if the bank rate is 6%, the rate is 18% a year compounded monthly, so ₹10,00,000 overdue for six months carries about ₹93,443 of interest.
The rule
- Rate: three times the RBI bank rate
- Compounding: monthly
- From: the "appointed day", which is the day after the payment deadline in Section 15 (15 days from acceptance without a written agreement; the agreed date, capped at 45 days, with one)
- Override: it applies notwithstanding anything in the agreement between buyer and supplier
The bank rate is changed by the RBI from time to time. Use the rate in force for the period of delay; check the current figure on the RBI website before you calculate.
How to calculate it
Monthly rate = (3 × bank rate) ÷ 12. Interest = principal × ((1 + monthly rate) ^ months of delay − 1).
| Item | Example |
|---|---|
| Overdue amount | ₹10,00,000 |
| Bank rate (illustrative) | 6% a year |
| Statutory rate | 18% a year, which is 1.5% a month |
| Delay | 6 months |
| Interest | ₹10,00,000 × (1.015^6 − 1) = ₹93,443 |
| Total due | ₹10,93,443 |
For part of a month, the usual approach is to pro-rate that month's interest by days.
Who can claim it
Suppliers that are micro or small enterprises with Udyam registration. Medium enterprises and pure traders are generally outside these provisions. The buyer can be any business or government body.
Other consequences for the buyer
- Interest paid or payable under the MSMED Act is not deductible for income tax (Section 23).
- The purchase itself may be disallowed for the year under Section 43B(h) if it was not paid in time.
- Unpaid principal and interest to micro and small suppliers must be disclosed in the buyer's annual accounts (Section 22).
- Companies with dues to micro and small enterprises outstanding beyond 45 days must report them to the Ministry of Corporate Affairs in the half-yearly MSME return.
How to actually collect the interest
State the interest in your reminders and in the legal notice, and claim it in your MSME Samadhaan application. In negotiation, the statutory interest is strong leverage: many buyers agree to pay the full principal quickly in exchange for a reduction in interest.
If you are not an MSME, you can claim interest at the rate in your contract or invoice terms; without one, a court can still award reasonable interest.
Frequently asked questions
What is the interest rate on delayed payment to MSMEs?
Three times the bank rate notified by the RBI, compounded monthly, under Section 16 of the MSMED Act.
From which date is the interest counted?
From the appointed day: the day after the 15-day period where there is no written agreement, or the day after the agreed date (not later than 45 days from acceptance) where there is one.
Can the buyer and supplier agree to a lower rate or no interest?
Section 16 applies notwithstanding any agreement, so the statutory right remains. A supplier may still choose to give up part of the interest as part of a settlement.
Can the buyer claim the interest as a business expense?
No. Section 23 of the MSMED Act says interest payable under the Act is not allowed as a deduction for income tax.
Do medium enterprises get this interest?
No. The delayed-payment provisions cover micro and small enterprises.
This guide is general information for Indian businesses, not legal advice for your specific case. Laws and rates change; check the current position or speak to an advocate before acting.
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