MSMED Act Section 16: Delayed Payment Interest Explained

What Is Section 16 of the MSMED Act?

The Micro, Small and Medium Enterprises Development Act, 2006 devotes Chapter V, Sections 15 through 25, to delayed payments. Section 16 is the interest provision: it says that where a buyer fails to pay a supplier as required under Section 15, the buyer becomes liable to pay compound interest with monthly rests, at three times the Bank Rate notified by the RBI, and this obligation applies regardless of anything to the contrary in the contract between the parties or in any other law.

The provision only protects "suppliers" as the Act defines the term, which covers micro and small enterprises registered under the Act; medium enterprises are excluded from Section 16's interest protection specifically. Its predecessor, the Interest on Delayed Payments to Small Scale and Ancillary Undertakings Act, 1993, set interest at five points above the highest bank lending rate, later at one-and-a-half times the SBI prime lending rate; the MSMED Act's three-times-Bank-Rate, monthly-compounding formula is considerably more punitive than either.

When Does Interest Become Payable?

Section 15 sets the credit period rules that Section 16 hangs off. If the buyer and supplier have a written agreement on payment terms, the agreed period applies, but it cannot exceed 45 days from the day of acceptance, or deemed acceptance, of the goods or services. If there's no written agreement, the default period is 15 days from acceptance. The "appointed day," the point from which Section 16 interest starts running, is the day immediately after whichever of these periods applies.

Acceptance itself has a specific meaning under the Act: if the buyer doesn't raise an objection in writing within 15 days of delivery, the goods or services are deemed accepted on that date, even without an explicit sign-off. That matters because businesses sometimes count from the invoice date instead, which can understate how long a payment has actually been overdue.

What Is the RBI Bank Rate?

The Bank Rate is a specific rate the Reserve Bank of India notifies, distinct from the repo rate that dominates most news coverage of monetary policy decisions. The Bank Rate has historically been kept aligned with the Marginal Standing Facility (MSF) rate, which sits above the repo rate in the RBI's rate corridor. Because these are different published figures, using the repo rate in a Section 16 calculation instead of the Bank Rate will produce an incorrect result.

We don't publish a fixed "current Bank Rate" figure or a historical rate table on this page. The Bank Rate changes periodically, our last verification of a specific figure can go stale between updates, and a wrong number in a statutory interest calculation is a bigger risk than a mildly inconvenient extra step. Instead, the calculator below asks you to enter the Bank Rate yourself, and we link directly to RBI's official publications so you can confirm the figure applicable to your overdue period before calculating.

Step-by-Step Interest Calculation

1. Identify the principal — the invoice amount, or the portion of it, that remains unpaid.
2. Find the appointed day — the agreed date (capped at 45 days from acceptance) or 15 days from acceptance if there's no written agreement; interest starts the day after.
3. Confirm the applicable Bank Rate — from RBI's official notifications, for the period the payment was overdue.
4. Apply the 3× multiplier — to get the statutory annual rate.
5. Convert to a monthly rate — divide the annual rate by 12.
6. Compound monthly — over the number of months (and part-months) the payment was overdue.
7. Subtract the principal — the difference is the interest owed under Section 16.

Worked Example

An MSME supplier delivers goods worth ₹5,00,000 on 1 January. The buyer doesn't raise any objection, so the goods are deemed accepted 15 days later, on 16 January. There's a written agreement for 30-day credit from acceptance, so the due date is 15 February, and the appointed day, when interest starts, is 16 February. The buyer actually pays on 30 June, 134 days after interest started, or roughly 4.4 months.

Using an illustrative Bank Rate of 6.5% for the full period (verify the actual notified rate before relying on this), the statutory annual rate is 3 × 6.5% = 19.5%, or roughly 1.625% per month. Compounded monthly over 4.4 months, ₹5,00,000 grows to approximately ₹5,37,300, an interest amount of roughly ₹37,300. If the Bank Rate changed partway through those 4.4 months, the V.K. Patel v. Simplex Infrastructure interpretation would require recalculating with the rate applicable in each affected month rather than using one fixed rate throughout, which the simplified version above doesn't do; the embedded calculator likewise uses one rate for the full period, and flags this limitation.

Common Mistakes

How to Recover Interest

Section 17 makes the buyer liable for the amount owed, including the Section 16 interest, and this can be recovered under Section 18 through a reference to the state's Micro and Small Enterprise Facilitation Council (MSEFC). Before filing, it helps to have the invoice, proof of delivery or acceptance, any written credit-period agreement, and a record of any payment reminders already sent, since these establish both the debt and the delay.

A written demand citing Sections 15 and 16, with the interest amount calculated, is often the first step before a formal reference, both because it sometimes resolves the matter without a filing and because it creates a paper trail. If that doesn't produce payment, the next step is a reference to the MSEFC.

MSME Samadhaan and the ODR Portal

The Ministry of MSME launched the MSME Samadhaan portal in October 2017 as the original online mechanism for filing delayed payment complaints with the MSEFC. This changed in 2025: the Ministry launched the MSME Online Dispute Resolution (ODR) Portal on 27 June 2025, and as of 15 October 2025, all new delayed payment complaints must be filed on the ODR Portal at odr.msme.gov.in rather than on Samadhaan. Samadhaan continues to show status updates for complaints filed before that cutoff, and automatically redirects new filers to the ODR Portal.

To file, an MSME needs a valid Udyam Registration that existed at the time of the transaction, proof the goods or services were supplied under an agreement or purchase order, and confirmation the payment is overdue beyond the Section 15 period. Filing is free for micro and small enterprises. Once a reference is made, the MSEFC is required by the Act to dispose of it within 90 days, and businesses can generally represent themselves through the process without engaging outside counsel.

ODR Filing Readiness Checklist

Check off what you already have before starting a filing on the ODR Portal. This doesn't submit anything or store your answers anywhere; it's just a local checklist to help you see what's missing before you begin.

Section 43B(h) Connection

The Finance Act, 2023 added clause (h) to Section 43B of the Income Tax Act, effective from Assessment Year 2024-25. It disallows a buyer's tax deduction for amounts payable to a registered micro or small enterprise unless the payment is made within the Section 15 timeline, 15 days without a written agreement or up to 45 days with one. If the amount is still unpaid at the end of the financial year, the deduction shifts to the year the payment is actually made, regardless of the buyer's accounting method.

This runs alongside Section 16 interest, not instead of it. A buyer who pays late faces the compound interest liability under Section 16 and, separately, the loss of the purchase deduction under Section 43B(h) for that financial year. Under the Income Tax Act, 2025, effective from 1 April 2026, this provision carries forward with equivalent effect under revised clause numbering; confirm the exact current section reference with a tax advisor before relying on it for a filing.