Corporate and Economic Laws · Specific Legal Provisions related to MSME Sector

Delayed Payments to Micro and Small Enterprises under the MSMED Act

Updated 11 October 2026 · Fact-checked

A buyer must pay a micro or small supplier by the agreed date, or by the appointed day if nothing is agreed. A written agreement cannot exceed 45 days. On delay, the buyer owes compound interest with monthly rests at three times the bank rate notified by RBI. This interest is not deductible from income.

Understand Delayed Payments to Micro and Small Enterprises

The MSMED Act, 2006 protects small suppliers whose money gets stuck with large buyers. Sections 15, 16 and 23 are the core: when to pay, what interest follows delay, and what the tax treatment is.

Start with who is protected. Under section 2(n), a supplier is a micro or small enterprise that has filed a memorandum under section 8(1). It also includes bodies like NSIC, State small industries corporations, and companies, societies or trusts that sell goods or services of micro or small enterprises. A medium enterprise is not a supplier under this definition. A buyer is anyone who buys goods or receives services from a supplier for consideration.

Now the payment time. Section 15 says the buyer must pay on or before the date agreed in writing. If there is no written agreement, the buyer must pay before the appointed day. The proviso caps any written agreement at 45 days from the day of acceptance or deemed acceptance. The appointed day is the day after 15 days from the day of acceptance or deemed acceptance.

Acceptance is the day of actual delivery of goods or rendering of services. If the buyer objects in writing within 15 days of delivery, acceptance is the day the supplier removes the objection. If there is no written objection within 15 days, deemed acceptance is the day of actual delivery.

On default, section 16 imposes compound interest with monthly rests at three times the bank rate notified by the Reserve Bank. It applies despite any contrary agreement or law. It runs from the appointed day or, where a date was agreed, from the day after that date. Under section 23, this interest is not allowed as a deduction in computing income. Section 22 requires audited buyers to disclose unpaid principal and interest in their annual accounts, to support this disallowance.

Key rules to remember

Payment deadline (section 15): Pay on or before the agreed written date; if no agreement, before the appointed day; A written agreed period can never exceed 45 days from acceptance or deemed acceptance.
Appointed day (section 2(b)): Appointed day = day after 15 days from the day of acceptance or deemed acceptance; Applies when there is no written agreement. Count 15 days, then the next day is the appointed day.
Interest on delay (section 16): Compound interest with monthly rests at 3 × bank rate notified by RBI; Runs from the appointed day, or the day after the agreed date. Overrides any agreement or law to the contrary.
Tax treatment (section 23): Interest payable or paid under the Act is not deductible in computing income; Applies whether the interest is merely payable or actually paid. The Act's text refers to the Income-tax Act, 1961.
Disclosure (section 22): Audited buyer shows unpaid principal and interest separately, interest paid, interest accrued and unpaid; Applies to a buyer required to get annual accounts audited.

How to solve Delayed Payments to Micro and Small Enterprises questions

Use this order for any numerical or theory question on delayed payment to a micro or small supplier.

1Check the supplier. Is it a micro or small enterprise that has filed a memorandum (or a listed type of body)? If it is medium or unregistered, the section 15 and 16 protection does not apply.
2Fix the acceptance date. Use the delivery date unless the buyer objected in writing within 15 days; then use the date the objection was removed.
3Find the due date. If a written agreement exists, use it, but cap it at 45 days from acceptance. If none, use the appointed day (acceptance plus 15 days, then the next day).
4Compare with the actual payment date. If paid on time, no interest arises.
5If late, compute interest from the appointed day, or from the day after the agreed date, at three times the bank rate, compounded with monthly rests.
6State the tax result: the interest, payable or paid, is not deductible under section 23.
7Add the disclosure point: an audited buyer shows principal and interest separately under section 22.
8Give a clear conclusion in the final line.

Quickest way: Three-line check for MCQs

When to use it: Use in Section A MCQs or when a case gives dates and asks if interest is payable.

Supplier micro or small and registered? If not, stop.
Due date = written date (max 45 days) or acceptance + 15 days, then the next day.
Late? Interest is 3 × bank rate, monthly rests, compound, and never deductible.

Common mistakes in Delayed Payments to Micro and Small Enterprises

Allowing a written agreement of 60 or 90 days
Students assume parties can agree anything.
Fix: The proviso to section 15 caps any written period at 45 days from acceptance or deemed acceptance.
Treating the appointed day as day 15
The wording sounds like 15 days after acceptance.
Fix: It is the day following the expiry of 15 days, so it is day 16 when counting from acceptance.
Using simple interest or the bank rate itself
Students recall only 'interest on delay'.
Fix: Section 16 says compound interest with monthly rests at three times the bank rate.
Allowing the interest as a business expense
Interest is usually deductible, so students apply that default.
Fix: Section 23 disallows interest payable or paid under the Act, even if the buyer has not yet paid it.
Applying the rule to a medium enterprise supplier
Students read 'MSME' as covering all three.
Fix: Section 2(n) defines supplier as a micro or small enterprise that filed a memorandum, plus the listed bodies.
Ignoring a written objection when fixing acceptance
Students always use the delivery date.
Fix: If the buyer objects in writing within 15 days, acceptance is the day the supplier removes the objection.

Worked examples

Example 1

Anand Textiles Ltd bought goods from Shree Ram Fabrics, a small enterprise with a filed memorandum. The goods were delivered on 1 March and no written objection was made. There was no written agreement on payment. By which date must Anand Textiles pay to avoid interest under the MSMED Act?

Show the solution

The supplier is a small enterprise with a filed memorandum, so the Act applies.
No written objection within 15 days, so deemed acceptance is the day of delivery: 1 March.
There is no agreement, so the appointed day applies.
15 days from 1 March expire on 16 March.
The appointed day is the day following, which is 17 March.
Payment must be made before the appointed day, that is, on or before 16 March.
Payment from 17 March onwards attracts interest under section 16.

Answer: Anand Textiles must pay on or before 16 March. If it pays later, compound interest with monthly rests at three times the bank rate is payable from 17 March, the appointed day.

Example 2

Mehta Engineering, a buyer, agreed in writing to pay Kisan Tools, a micro enterprise with a filed memorandum, within 90 days of delivery. Delivery was accepted without objection. Mehta Engineering pays after 100 days, and says no interest arises because the agreement allowed 90 days. Also, can it claim the interest as a tax deduction?

Show the solution

Kisan Tools is a micro enterprise with a memorandum, so it is a supplier.
Section 15 proviso: a written agreed period cannot exceed 45 days from acceptance or deemed acceptance.
The 90-day term therefore cannot stand beyond 45 days. The buyer was required to pay within 45 days.
Payment after 100 days is late. Section 16 applies despite any agreement to the contrary.
Interest is compound with monthly rests at three times the bank rate notified by RBI.
Under section 23, the interest payable or paid is not allowed as a deduction in computing income.
As an audited buyer, Mehta Engineering must disclose the unpaid principal and interest separately under section 22.

Answer: Mehta's argument fails. The written period is capped at 45 days, so the payment is late and compound interest at three times the bank rate is payable. The interest is not deductible under section 23.

Exam tips

Memorise the three numbers: 15 days (appointed day), 45 days (cap on written agreement) and 3 times the bank rate. Examiners build MCQs on swapping them.
In case scenarios, check first whether the supplier is micro or small and has a memorandum. A medium supplier is a common trap.
Always write 'compound interest with monthly rests' in full, since simple interest options are used as distractors.
For tax questions, quote section 23 and say the disallowance applies to interest payable as well as paid.
Link section 22 disclosure to section 23 in long answers; the Act itself says the disclosure is for disallowance purposes.

Practice questions from Specific Legal Provisions related to MSME Sector

Delayed Payments to Micro and Small Enterprises in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Delayed Payments to Micro and Small Enterprises: frequently asked questions

What is the maximum time to pay a micro or small enterprise?

If there is a written agreement, the period cannot exceed 45 days from the day of acceptance or deemed acceptance. If there is no written agreement, the buyer must pay before the appointed day, which follows 15 days from acceptance.

What rate of interest applies on delayed payment under the MSMED Act?

Section 16 provides compound interest with monthly rests at three times the bank rate notified by the Reserve Bank. It applies despite any agreement or law to the contrary.

Is interest paid under the MSMED Act deductible from income?

No. Section 23 says interest payable or paid by a buyer under the Act is not allowed as a deduction in computing income. The section applies even if the interest is only payable and not yet paid.

What is the appointed day under the MSMED Act?

It is the day following the expiry of 15 days from the day of acceptance or deemed acceptance of goods or services. It applies when there is no written agreement on the payment date.