MSME 45-day payment rule: interest, MSME-1 and tax disallowance

By Vikash Khanal, Finance Manager · Updated 7 October 2026

Under the MSME 45-day payment rule, a buyer must pay a micro or small enterprise supplier within the agreed period, which can never exceed 45 days from acceptance of the goods or services, or within 15 days if nothing was agreed in writing. Pay late and three things follow: compound interest at three times the RBI bank rate, a half-yearly MSME-1 return if you are a company, and a year-end add-back of the unpaid amount in your income-tax computation.

Below: how the dates are counted, what the interest costs, MSME-1 and the notes to accounts, and the monthly controls that keep the add-back at zero. For the numbers, use the MSME payment tracker.

Who is covered and who is not

The protection belongs to a supplier: a micro or small enterprise that holds a Udyam registration (s.2(n) of the MSMED Act). The buyer can be anyone.

Traders were brought onto Udyam by the Ministry of MSME's office memorandum of 2 July 2021 only for priority sector lending, which is why most practitioners keep them outside the delayed-payment rules. On 21 July 2026 the Finance Ministry told the Rajya Sabha that the tax rule covers enterprises classified as micro or small under the MSMED Act; it did not extend it to medium enterprises or traders.

Classification is by investment and turnover (since 1 April 2025, micro up to ₹2.5 crore and ₹10 crore; small up to ₹25 crore and ₹100 crore), and a supplier can change category when its Udyam is updated.

Counting the 45 days: s.15 and the appointed day

• Written agreement: pay on or before the agreed date, but the agreed period cannot exceed 45 days from the day of acceptance or deemed acceptance.
• No written agreement: pay before the appointed day, which is the day after 15 days from acceptance (s.2(b)). In practice, by day 15.
• Deemed acceptance: if the buyer raises no written objection within 15 days of delivery, the goods or services are deemed accepted on the delivery date. A GRN raised late does not move the clock.

Most disputes before the Facilitation Council turn on the date of acceptance. Keep GRN and invoice evidence.

Interest at three times the bank rate: s.16 worked example

If the buyer misses the s.15 date, s.16 makes it liable to pay compound interest with monthly rests at three times the bank rate notified by the RBI, from the appointed day or agreed date, notwithstanding anything in the contract. You cannot contract out of it.

The rate today. On 7 October 2026 the Monetary Policy Committee raised the repo rate by 25 basis points to 5.50%, which takes the Bank Rate to 5.75% (it was 5.50% from December 2025). Three times that is 17.25% a year, or 1.4375% a month. Delays that started before 7 October were running at 16.5%. Whether the rate is fixed at the due date or moves with each change in the bank rate is not settled by the text; many buyers apply the rate in force for each month of delay verify.

Example. A small-enterprise supplier delivers goods worth ₹10,00,000 accepted on 16 September 2026. The written agreement says 45 days, so payment is due on 31 October 2026. The buyer pays on 31 January 2027, three months late.

Interest is ₹43,748 on a three-month delay, an effective 17.5% a year. Simple interest for the same 92 days would be ₹43,479, so the cost is the rate, not the compounding. Pro-rate a broken last month on days.

Under s.23 this interest is never deductible for income-tax.

The year-end tax add-back: s.37(2)(g) [43B(h)]

From tax year 2026-27 the rule sits in s.37(2)(g) of the Income-tax Act 2025 [43B(h) of the 1961 Act]: any sum payable to a micro or small enterprise beyond the s.15 time limit is deductible only in the year it is actually paid. Section 37(3) lets other s.37(2) items be claimed if paid by the return due date, but it expressly excludes clause (g). There is no grace until the return due date.

Example. A company closes tax year 2026-27 on 31 March 2027 with these unpaid supplier invoices:

A and B are deducted in tax year 2027-28, when paid. C is unpaid at year end but is paid inside its s.15 window, so it stays deductible in 2026-27. At a 25.168% tax rate, the ₹10 lakh add-back is a ₹2.52 lakh cash-tax timing cost for one year, on top of any s.16 interest.

The disallowance applies to the amount debited to profit and loss, so the add-back is the expense element: for a purchase with GST credit, that is the taxable value, not the GST you have claimed as input tax credit verify. Report it in Form 26 [3CA/3CD].

MSME-1 half-yearly return

Under the Specified Companies (Furnishing of information about payment to micro and small enterprise suppliers) Order 2019, amended with effect from 15 July 2024, every company that receives supplies from micro or small enterprises and whose payments to them exceed 45 days from acceptance must file MSME Form I on the MCA portal.

The revised form asks, supplier by supplier, for amounts paid within 45 days (through TReDS or otherwise), amounts paid after 45 days, amounts outstanding for 45 days or less and for more than 45 days, and the reasons for delay. The return for April to September 2026 is due on 31 October 2026. Check fees and forms on the MCA compliance calendar.

Disclosure in the accounts: s.22 and Schedule III

Section 22 requires a buyer whose accounts are audited to disclose, in its annual accounts:

1. principal and interest remaining unpaid to each supplier at year end;
2. interest paid under s.16, with the amounts paid beyond the appointed day;
3. interest due for the delay where principal was paid late but interest was not added;
4. interest accrued and remaining unpaid at year end; and
5. further interest remaining due in later years until it is paid, for the s.23 disallowance.

Schedule III also requires trade payables to be split between micro and small enterprises and others, on the balance sheet and in the ageing schedule. Auditors test the split against Udyam certificates. See MSME compliance for SMEs and Companies Act compliance.

MSMED (Amendment) Act 2026: what changed

Parliament passed the MSMED (Amendment) Bill in August 2026 (Rajya Sabha 3 August, Lok Sabha 7 August). The Act was published in the Gazette on 13 August 2026; commentators differ on whether all provisions are in force or await separate notification verify. The main changes:

• time limits for Facilitation Council mediation and arbitration, and online dispute resolution;
• awards recoverable as arrears of land revenue, with at least 50% released to the supplier if a challenge is pending over six months;
• settlement of MSME invoices through TReDS made compulsory for central public sector enterprises;
• classification thresholds moved to notification, and offences replaced by graded civil penalties.

Sections 15 and 16 are unchanged. For a private buyer the effect is faster enforcement. Track notifications on Updates.

Common mistakes

• Counting 45 days from the invoice date when the goods were accepted earlier.
• Treating "90 days credit" in the PO as valid. It is capped at 45 days.
• Assuming no written agreement means 45 days. It means 15.
• Including traders and medium enterprises in the add-back, which overstates tax.
• Paying late and never computing the interest, so the s.22 note is wrong.

Monthly control checklist

1. Vendor master: Udyam number, category (micro, small, medium, trader) and date verified, for every supplier.
2. Payment terms: written agreement captured, capped at 45 days; blank terms default to 15 days.
3. GRN discipline: acceptance or objection recorded within 15 days of delivery.
4. Payables run: MSE invoices due in the next 10 days flagged and paid first. The MSME payment tracker does this from a CSV.
5. Overdue register: any MSE invoice past its s.15 date, with s.16 interest accrued at the current rate.
6. 31 March: final add-back schedule for the tax audit, and the s.22 note for the auditors.
7. 30 April and 31 October: MSME-1. Diarise them with the rest of the compliance chart.

Frequently asked questions

Sources

• MSMED Act 2006, ss.2, 15, 16, 22, 23 (India Code)
• Income-tax Act 2025, s.37 (Income Tax Department)
• Reserve Bank of India: policy rates and Monetary Policy Statement, 7 October 2026
• RBI notification on retail and wholesale trade as MSMEs (Ministry of MSME OM, 2 July 2021)
• Ministry of Corporate Affairs: MSME Form I and the Specified Companies Order 2019, as amended 15 July 2024
• Ministry of MSME: MSMED (Amendment) Act 2026 and classification notifications

Rates and rules checked on 7 October 2026. This is a working aid, not legal advice.