MSMED Act delayed payments: the 45-day rule, interest and your rights

Why this law matters to small suppliers

Delayed payment is one of the biggest pressures on small Indian businesses. You buy raw material or stock, pay your staff and GST on time, and then wait months for a large buyer to clear your invoice. Parliament addressed this in the Micro, Small and Medium Enterprises Development Act, 2006, usually called the MSMED Act. Its Chapter V, on delayed payments to micro and small enterprises, gives eligible suppliers a deadline, a strong interest right and a dedicated dispute forum.

This guide explains those rights in plain language. It is not legal advice; for your specific case, consult a qualified advocate or CA.

Who is protected

The delayed-payment chapter protects a supplier, which Section 2(n) defines as a micro or small enterprise that has registered. Today that status is shown by registration on the Udyam portal, which replaced the earlier memorandum and Udyog Aadhaar systems.

• Micro and small enterprises in manufacturing or services registered on Udyam are covered as suppliers.
• Medium enterprises are not covered by the delayed-payment chapter, even though they are MSMEs for other purposes. The Supreme Court confirmed this in NBCC (India) Ltd v. State of West Bengal (10 January 2025).
• Retail and wholesale traders are excluded in practice (see below).
• The buyer can be any business that buys goods or services from such a supplier, whether a large company, a government department or another MSME.

Classification depends on investment in plant and machinery or equipment and on turnover, using limits notified by the government that have been revised over time. Check your current category on your Udyam certificate or the Ministry of MSME website rather than relying on old figures.

When should you register?

Whether a Udyam registration obtained after the contract protects earlier supplies is currently unsettled. Silpi Industries v. Kerala SRTC (2021) and Gujarat State Civil Supplies v. Mahakali Foods (2022) said a later registration works only for later supplies. In NBCC v. State of West Bengal (10 January 2025), the Supreme Court said registration is not a precondition for a Section 18 reference and referred the question to a three-judge bench, which has not yet decided it. The portal still expects registration before the date of the disputed invoice. Practical advice: register on Udyam before you sell. If you registered later, take legal advice.

The 15/45-day rule (Section 15)

Section 15 sets out when the buyer must pay:

• If there is a written agreement on payment, the buyer must pay on or before the agreed date. That agreed period cannot exceed 45 days from the day of acceptance or deemed acceptance of the goods or services.
• If there is no agreement, the buyer must pay before the "appointed day", which is the day following the expiry of 15 days from acceptance or deemed acceptance (Section 2(b)).

"Acceptance" means the day the goods are delivered or services rendered. If the buyer raises a written objection within 15 days of delivery, acceptance is counted from when the objection is removed. If no objection is raised within that window, the goods or services are treated as accepted on delivery, which the Act calls "deemed acceptance".

In practice, keep proof of delivery and note the date. Your clock starts from there. We work through real dates in the MSME 45-day rule explained.

Interest on late payment (Sections 16 and 17)

If the buyer misses the Section 15 deadline, Section 16 makes it liable to pay compound interest with monthly rests on the amount due, at three times the bank rate notified by the Reserve Bank of India. Interest runs from the appointed day or the day after the agreed date, and it applies "notwithstanding anything contained in any agreement". Section 17 makes the buyer liable for the principal plus this interest.

"Monthly rests" means interest is added to the outstanding amount every month, and the next month's interest is calculated on that larger figure. Over a long delay this adds up meaningfully.

The RBI Bank Rate is set by the Reserve Bank of India and changes from time to time. For example, at a Bank Rate of 5.75% (RBI, November 2026) the rate is 17.25% a year, compounded monthly. Check rbi.org.in for the current rate on the date of your calculation, and use the calculator below to estimate interest on an overdue invoice.

You can also open the full MSME interest calculator. Treat its output as an estimate; the final amount in a dispute is decided by the Facilitation Council or the arbitrator.

Buyer cannot deduct the interest (Section 23)

Section 23 says the interest payable under the Act is not allowed as a deduction when computing the buyer's income for income-tax purposes. Paying late therefore costs the buyer the interest itself, with no tax relief on it.

Disclosure in the buyer's accounts (Section 22)

Buyers whose annual accounts must be audited are also required to disclose amounts unpaid to micro and small suppliers, and the interest on them, in their annual statement of accounts.

Section 43B(h), now section 37(2)(g)

The Finance Act, 2023 added clause (h) to Section 43B of the Income-tax Act, 1961, effective from assessment year 2024-25 (financial year 2023-24 onwards). It is carried forward as section 37(2)(g) of the Income-tax Act, 2025 from 1 April 2026. Under it, a buyer can deduct an amount payable to a micro or small enterprise beyond the time limit in Section 15 of the MSMED Act only in the year it is actually paid. If the buyer pays within that time limit, the normal accrual-based deduction applies (Memorandum explaining the Finance Bill, 2023).

For suppliers, this is useful context in a polite conversation: paying on time helps the buyer's own tax position, especially around the end of the financial year. It is the buyer's tax matter, though, so suggest they check with their CA rather than advising them yourself. There is no official clarification on dues to traders, and most professionals take the view that they fall outside the rule. More detail is in our explainer on Section 43B(h) and the glossary entry for Section 43B(h).

MSE Facilitation Council and the MSME ODR portal (Section 18)

If a buyer does not pay, an eligible supplier can refer the dispute to the Micro and Small Enterprises Facilitation Council of its own state, whatever state the buyer is in. New delayed-payment applications are filed on the MSME ODR portal (odr.msme.gov.in), which replaced MSME Samadhaan for new applications. You do not need to send a legal notice before filing.

1. File the application

   Log in to the ODR portal with your Udyam details (your seller details are auto-filled), enter the buyer, invoices, payments received and amount due with interest, and upload the work order or agreement, invoices and correspondence.

2. Conciliation

   The Council first conducts conciliation itself or through an institution, aiming for an agreed settlement between you and the buyer.

3. Arbitration

   If conciliation fails, the Council can take up the dispute for arbitration itself or refer it to an arbitration institution. Section 18(5) provides for the reference to be decided within 90 days.

4. Award and challenge

   If the buyer wants to challenge an award in court, Section 19 requires it to first deposit 75% of the awarded amount, and the court may release part of it to the supplier.

An arbitration clause in your contract does not stop you from approaching the Council, and the parties cannot contract out of Section 18 (Gujarat State Civil Supplies v. Mahakali Foods, Supreme Court, 31 October 2022).

Time limits: conciliation versus arbitration

The Limitation Act applies to the arbitration stage under Section 18(3), so claims older than the three-year limitation period can be time-barred there (Silpi Industries, 2021). It does not apply to conciliation under Section 18(2): even a time-barred claim can be referred to conciliation and settled (Sonali Power Equipments v. Chairman, MSEB, Supreme Court, 17 July 2025). Do not rely on that for old dues; file promptly.

The MSMED (Amendment) Act, 2026

The MSMED (Amendment) Act, 2026 received assent on 13 August 2026. Its new Section 15A, requiring central public sector enterprises to settle micro and small suppliers' invoices through TReDS, is in force from 15 October 2026. It also rewrites Section 18 with new 90-day limits for mediation and for the award, but those changes are enacted and not yet in force as of November 2026. Until they are notified, the Section 18 process described above is the law.

Our MSME ODR portal filing guide walks through the application step by step.

Practical checklist before you rely on the Act

• Confirm your Udyam registration is as a micro or small enterprise in manufacturing or services, not as a trader.
• Register before you sell, keep your details current and print the Udyam number on every invoice.
• Agree payment terms in writing, within the 45-day limit.
• Keep proof of delivery and of any objection or its resolution.
• Send polite reminders and a demand letter before filing, and keep copies. Neither is legally required, but they show you acted fairly.
• Do not let old dues drift: arbitration claims are subject to the three-year limitation period.

Using the law without spoiling the relationship

The Act is a strong safety net, but you rarely need to start with it. Most buyers pay once they are reminded clearly and politely, and once they understand that late payment costs them interest and a tax deduction. Start with the friendly steps in our complete guide to recovering overdue payments, and keep the Facilitation Council for buyers who ignore every reasonable request.

Udhaar Wapas runs that polite escalation for each overdue invoice and, where you are eligible, prepares the documents you need for an MSME ODR portal filing. Read more on our compliance page.