The rule in one paragraph
Under the Micro, Small and Medium Enterprises Development Act, 2006, a buyer must pay a micro or small supplier by the agreed date, which cannot be more than 45 days from acceptance of the goods or services (or 15 days if there is no agreement). If the buyer pays late, Section 16 makes it liable to pay compound interest with monthly rests at three times the bank rate notified by the RBI, from the date payment fell due — regardless of what the contract says.
Step 1: find the due date
Start from the date of acceptance (or deemed acceptance) of the goods or services — usually the delivery or GRN date unless the buyer raised a written objection. Add the agreed credit period, capped at 45 days. That is the due date. Interest runs from the day after it.
Step 2: find the rate
Take the RBI bank rate for the period and multiply it by three. With the bank rate at 5.50%, the rate is 16.5% a year. Because the RBI changes the bank rate from time to time, a precise claim applies the rate in force for each part of the delay.
Step 3: compound monthly
“Monthly rests” means the interest is added to the amount at the end of each month, and the next month’s interest is calculated on the higher total. The monthly rate is the annual rate divided by twelve — 1.375% at 16.5%.
The formula is: Interest = Principal × [(1 + annual rate ÷ 12)months of delay − 1]
A worked example
- Invoice: ₹5,00,000
- Goods accepted: 1 March; agreed credit period: 45 days; due date: 15 April
- Payment still pending six months after the due date
- Rate: 3 × 5.50% = 16.5% a year, or 1.375% a month
Interest = 5,00,000 × [(1.01375)6 − 1] ≈ ₹42,700. At twelve months the figure is about ₹89,000, and at twenty-four months roughly ₹1.94 lakh — the compounding makes long delays expensive for the buyer.
You can run your own numbers with our free MSME delayed payment interest calculator.
Points that change the number
- Udyam registration — the supplier must be a micro or small enterprise; medium enterprises are not covered by these provisions.
- Part-payments — each payment reduces the principal from its date, so the claim should be invoice-wise and payment-wise.
- Disputes on quality — a written objection within the acceptance period can shift the acceptance date.
- Bank rate changes — long delays may span more than one rate.
How to claim the interest
Send a demand notice with an invoice-wise statement of principal and interest. If the buyer still does not pay, file on the MSME Samadhaan portal; the matter goes to the Micro and Small Enterprises Facilitation Council for conciliation and, if needed, arbitration. A buyer who wants to challenge the Council’s award must first deposit 75% of the amount awarded. For buyers, there is also a tax cost: under Section 43B(h) of the Income-tax Act, 1961 (Section 37(2)(g) of the Income-tax Act, 2025), deduction for late payments to micro and small suppliers is allowed only when actually paid.