MSME delayed payment interest: how to calculate it (17.25% now)

MSME interest rate on delayed payment: 17.25% now

Section 16 of the MSMED Act, 2006 says that a buyer who does not pay a micro or small supplier on time must pay compound interest with monthly rests at three times the bank rate notified by the Reserve Bank. It applies "notwithstanding anything contained in any agreement", so a contract cannot lower it.

The RBI set the Bank Rate at 5.75% in its policy statement of 7 Oct 2026. Before that it was 5.50%, which gave 16.50%. The full history is below.

Who can claim MSME delayed payment interest

• Micro and small enterprises. The Act gives the right to a "supplier": a micro or small enterprise that has filed its memorandum, which today means Udyam registration. It also covers NSIC, state small industries corporations and bodies that sell goods made by micro and small units.
• Registered before the bill. The MSME Ministry’s Samadhaan FAQ says Udyam registration is required, and that it must be in place before the date of the disputed invoice.
• Not medium enterprises. A medium enterprise is not a "supplier" under the Act. The Ministry’s FAQ notes one exception: a small enterprise that grows into a medium one keeps its non-tax benefits, including this one, for three years after the change.
• Not retail or wholesale traders. Traders were allowed onto Udyam in July 2021, but only for priority sector lending. A Ministry office memorandum of 1 Sep 2021 says the delayed payment provisions are excluded for them, and the Samadhaan FAQ says councils do not admit claims under NIC codes 45, 46 and 47 or from units registered as traders.

Investment means plant and machinery or equipment, and both limits must be met.

The MSME 45-day rule: when interest starts

Under section 15, the buyer must pay by the date agreed in writing, but the agreed period can never be more than 45 days from the day of acceptance. With no written agreement, the buyer must pay before the "appointed day": the day after 15 days from acceptance. Interest runs from the appointed day, or from the day after the agreed date (section 16).

The day of acceptance is the day the goods are delivered or the service is given. If the buyer objects in writing within 15 days, it is the day the supplier removes the objection.

The table counts the day after acceptance as day 1. Counting can move a date by a day, so check the exact dates with your CA or lawyer for a claim.

How to calculate MSME interest on delayed payment, with example

A micro enterprise supplies goods worth ₹2,00,000, accepted on 16 Sep 2026, on 45 days’ credit. The last day to pay is 31 Oct 2026, but the buyer pays nothing until 1 May 2027. Interest runs from 1 Nov 2026: 6 whole months. We assume the Bank Rate stays at 5.75%.

1. Monthly rate: 17.25% ÷ 12 = 1.4375%.
2. Each month, interest = amount due at the start of the month × 1.4375%. Add it to the amount due: that is the monthly rest.
3. Repeat for every month. The interest owed is the final amount minus the bill.

Fixed or changing Bank Rate? Readings differ

Section 16 says "three times of the bank rate notified by the Reserve Bank", but not on which date. So when the Bank Rate changes during a long delay, there are two readings:

• Fixed: use the Bank Rate in force on the day interest starts, for the whole period.
• Changing: at each monthly rest, use the Bank Rate in force then. The Calcutta High Court took this view in V.K. Patel & Co v. Simplex Infrastructure (9 Jul 2024) and rejected the supplier’s argument for the starting-day rate.

That is one High Court’s decision; other courts and councils may see it differently. Here is the gap on ₹2,00,000 with interest from 7 Jul 2026 to 7 Jan 2027, when the Bank Rate moved from 5.50% to 5.75% on 7 Oct 2026:

In this example the new rate counts from 7 Oct 2026, the day the RBI announced it, which is also a monthly rest. When a change falls mid-month, councils may treat that month differently. Ask your CA or lawyer which reading your council follows.

RBI Bank Rate history and the MSME rate

The Bank Rate did not change at the meetings of 6 Aug 2025, 1 Oct 2025, 6 Feb 2026, 8 Apr 2026, 5 Jun 2026, 5 Aug 2026. Dates are the last day of each Monetary Policy Committee meeting. The committee meets about every two months, so check the RBI’s policy page before you send a claim.

How to claim: the MSE Facilitation Council

• Ask in writing. Under section 17 the buyer owes the bill with the section 16 interest. A written demand with your working helps, though the Samadhaan FAQ says a legal notice is not required before going to the council.
• Refer it to the council. Either side can refer the dispute to the Micro and Small Enterprises Facilitation Council (section 18). It first tries conciliation, then arbitration if that fails, and the Act says a reference should be decided within 90 days. The council where the supplier is located can hear a claim against a buyer anywhere in India.
• Apply online. The MSME Samadhaan portal forwards the application to the council. You can claim interest alone even if the bill itself was paid late. The FAQ adds that the Limitation Act applies, and that a sum already claimed in a civil court cannot be claimed again before the council.
• Challenging an award. A buyer who wants a court to set aside the council’s award must first deposit 75% of the amount (section 19).

For loans between people rather than unpaid bills, see how to get back money you lent.

The buyer’s side: income tax

• The bill is deductible only when paid. Under section 37(2)(g) of the Income-tax Act, 2025, an amount payable to a micro or small enterprise beyond the section 15 time limit is allowed as a deduction only in the tax year it is actually paid. The usual extra time to pay before the return due date (section 37(3)) does not apply to it. In the 1961 Act this was section 43B(h).
• The interest is never deductible. Section 23 of the MSMED Act says interest paid under it is not allowed as a deduction. The section still names the 1961 Act, so ask your CA how it reads with the 2025 Act.
• Disclosure. A buyer whose accounts are audited must show the unpaid amounts and the interest in its annual accounts (section 22).

Sources

• MSMED Act, 2006: sections 2(b), 2(n), 15 to 19, 22 and 23
• RBI, Resolution of the Monetary Policy Committee, 7 Oct 2026 (Bank Rate 5.75%)
• MSME Ministry O.M. of 2 Jul 2021: retail and wholesale traders on Udyam, priority sector lending only
• O.M. of 1 Sep 2021: delayed-payment provisions excluded for traders
• MSME Samadhaan FAQ (registration, traders, monthly compounding, claims)
• S.O. 1364(E), 21 Mar 2025: micro, small and medium limits from 1 Apr 2025
• V.K. Patel & Co v. Simplex Infrastructure Ltd, Calcutta High Court, 9 Jul 2024
• Income-tax Act, 2025, section 37
• PIB, MSMED (Amendment) Bill, 2026 passed by Parliament