MSMED Act: What Happens When a Client Pays You Late (45-Day Rule and Interest)
A client sitting on your invoice for 60, 90 or 120 days isn't just a cash flow headache. If you're registered as a micro or small enterprise, it's something the law directly addresses. The Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 caps how long a buyer can take to pay, and makes a late payment expensive for the buyer in two separate ways.
Here's exactly what the law requires, what a late payment actually costs the buyer, and how a supplier enforces it if a client simply won't pay.
Quick answer
If you're a Udyam-registered micro or small enterprise, a buyer must pay you within 45 days of accepting your goods or services, even if your contract says otherwise. Miss that, and the buyer owes compound interest at three times the RBI bank rate on the overdue amount, and separately loses the tax deduction on that expense until they actually pay you. This protection applies only to registered micro and small suppliers, not to medium enterprises, and not to anyone who hasn't registered on Udyam.
Who this actually protects
This is the detail most people miss: the MSMED Act's payment-timeline and interest provisions (Chapter V of the Act) apply only where the supplier is a micro or small enterprise registered on Udyam. A medium enterprise doesn't get this specific protection, and neither does a genuinely small business that simply never registered. The buyer's own size doesn't matter: a large company and a small company are treated the same way as buyers under this chapter.
Registration status is checked as of the transaction, so if enforcing this matters to your business, register on the Udyam portal before you need to rely on it, not after a payment is already overdue.
The 45-day payment rule
Section 15 of the MSMED Act sets the payment timeline, and it works in two layers:
| Situation | Maximum payment period |
|---|---|
| No written agreement on payment terms | 15 days from acceptance of goods/services |
| Written agreement specifying a payment period | The agreed period, but never more than 45 days from acceptance |
"Acceptance" here means the day the goods or services are actually accepted, or, if the buyer raises no objection in writing within 15 days of delivery, the day that 15-day window ends (deemed acceptance). Critically, the 45-day ceiling can't be extended by agreement: a contract that says "payment within 60 days" doesn't change the buyer's legal exposure once 45 days have passed.
Interest if the buyer pays late
Section 16 of the Act makes a late payment costly, not just noncompliant. Once the payment period under Section 15 has run out, the buyer owes compound interest, with monthly rests, at three times the bank rate notified by the RBI , a materially higher rate than simple interest at the same headline percentage, because the interest itself accrues interest each month it remains unpaid.
This interest isn't something the supplier has to separately negotiate or prove damages for. It's a statutory right that runs automatically from the day after the payment period ends, whether or not the buyer disputes the invoice.
The tax consequence for the buyer
Beyond the interest the supplier can claim, a late payment creates a separate cost that hits the buyer through their own tax return. Under Section 43B(h) of the Income-tax Act, any amount payable to a Udyam-registered micro or small enterprise supplier is deductible as a business expense only in the year it's actually paid, once the 15/45-day limit under Section 15 has been crossed, not in the year the expense was incurred, the way most business expenses work on an accrual basis.
In practical terms: if a buyer owes a registered supplier money at year-end and hasn't paid within the MSMED timeline, that amount gets added back to the buyer's taxable income for that year. The deduction only becomes available in whichever later year the payment actually goes out, which can mean a real, unplanned tax cost on top of the interest owed to the supplier.
Which act applies to your tax figures
Section 43B(h) reflects the Income-tax Act, 1961 as it applies to the FY 2025-26 (AY 2026-27) return most readers are filing now. A new Income-tax Act has since taken effect, and this specific provision is reported (across several professional sources, though not independently verified here against the primary legislative text) to now sit at Section 37(2)(g) of the Income-tax Act, 2025. The underlying rule (deduction only on actual payment, once the MSMED timeline is missed) is the substantive point; confirm the exact current section reference with your CA if it matters for your specific filing year.
How a supplier actually enforces this
If a registered supplier isn't paid on time and the buyer won't cooperate, the complaint goes through the government's dispute mechanism rather than a regular civil suit. As of this article, new delayed-payment cases are filed on the MSME ODR (Online Dispute Resolution) Portal , which replaced the earlier Samadhaan portal for new filings from October 2025. Filing is free for micro and small enterprises.
The case is handled by the Micro and Small Enterprise Facilitation Council (MSEFC), which first attempts conciliation between the two parties and, if that fails, moves to arbitration. The MSEFC route is available only to micro and small suppliers. A medium enterprise with an unpaid invoice has to pursue a regular commercial dispute instead.
Worked example
A Udyam-registered small enterprise supplies goods worth ₹2,00,000 to a buyer on 1 January, with no written payment terms agreed. Under Section 15, the buyer must pay within 15 days, by 16 January. The buyer actually pays on 16 April, 90 days after the due date.
- Interest rate: at an illustrative RBI bank rate of 6.75%, three times that is 20.25% per annum, compounded monthly.
- Approximate interest for 3 months: roughly ₹2,00,000 × ((1 + 20.25%/12)^3 − 1) ≈ ₹10,300.
- Buyer's tax position: if 31 March falls inside this delay and the ₹2,00,000 is still unpaid on that date, the buyer can't deduct it as a business expense for that financial year. The deduction only becomes available in the year the payment is actually made.
Illustrative figures using an example RBI bank rate. The actual rate changes periodically, so check the current notified rate before relying on an exact interest figure.
Common mistakes
- Assuming any small business qualifies. Only a Udyam-registered micro or small enterprise gets these protections. An unregistered business, however small, doesn't.
- Believing a signed contract can extend payment past 45 days. It can't. The 45-day ceiling applies regardless of what the contract says.
- Treating medium enterprises the same as micro/small. The interest and MSEFC provisions are specifically for micro and small suppliers. A medium enterprise doesn't get this particular remedy.
- Overlooking the tax side as a buyer. A late payment isn't just interest owed to the supplier. It's a real, avoidable deduction disallowance on your own return under Section 43B(h).
- Trying to file on the old Samadhaan portal. New complaints go through the MSME ODR Portal now. Check you're using the current filing channel before assuming an old bookmark still works.