Interest on an Arbitration Award: How Much, From When, and Can It Compound?

For many claimants, interest is a large part of what an arbitration is worth. A ₹50 lakh claim that takes four years to reach an award, and another two years to be paid, can grow considerably with interest. For respondents, interest is often the part of the award that hurts most, because it keeps running while challenges are pending. Yet many parties do not plan their interest claims carefully, or do not know what the contract says about interest.

This guide is for claimants preparing a claim, respondents facing one, and award holders calculating what is due. In short: Section 31(7)(a) lets the tribunal award interest at a reasonable rate for the period before the award, on all or part of the sum, unless the parties agreed otherwise; Section 31(7)(b) says the sum awarded carries post-award interest at the rate in the award or, if the award is silent, at 2% above the current rate of interest on the date of the award; a contract clause barring interest binds the tribunal for the pre-award period, but not for post-award interest (Union of India v Larsen & Toubro, 2026); and MSME suppliers are entitled to compound interest at a statutory rate under the MSMED Act.

The contract's interest clause, and whether it bars interest, is the first thing to check.

The short answer

Interest in arbitration is usually thought of in three periods. First, the period from when the money became due until the claim is filed, often called pre-reference interest. Second, the period while the arbitration is pending, from the claim to the award, sometimes called interest during the proceedings. Section 31(7)(a) treats both together as the period "between the date on which the cause of action arose and the date on which the award is made", and lets the tribunal award interest at a reasonable rate unless the parties agreed otherwise. Third, the period after the award until payment, which Section 31(7)(b) deals with: the award's rate, or a default rate of 2% above the current rate of interest.

Interest at a glance

Pre-award interest and the contract

Section 31(7)(a) opens with "unless otherwise agreed by the parties". So if the contract fixes a rate of interest on delayed payments, the tribunal will usually apply it. If the contract says that no interest will be payable on amounts due, or on amounts withheld, or on claims, the tribunal is bound by that bar for the pre-award period. Many government contracts contain such clauses, for example saying that no interest is payable on security deposits or on amounts payable under the contract.

In Union of India v Larsen & Toubro (2026), the Supreme Court confirmed that a contractual bar on interest binds the tribunal for the pre-award and proceedings period, but that post-award interest under Section 31(7)(b) stands on a separate footing, and that the court may modify the post-award rate in an appropriate case. The exact wording of the bar matters: a clause barring interest on "amounts payable under the contract" may be read differently from one barring interest on "any claim". Claimants facing a bar should examine whether their claim, for example for damages, falls outside its wording.

Common interest questions

Post-award interest

After the 2015 amendment, Section 31(7)(b) says that a sum directed to be paid by an arbitral award shall, unless the award otherwise directs, carry interest at the rate of 2% higher than the current rate of interest prevalent on the date of the award, from the date of the award to the date of payment. The "current rate of interest" has the meaning given in the Interest Act, 1978: broadly, the highest of the maximum rates at which scheduled banks may pay interest on different classes of deposits under RBI directions.

Tribunals often fix a specific post-award rate, sometimes higher than the pre-award rate, to discourage delay in payment. Courts have upheld this. In Gayatri Balasamy v ISG Novasoft (2025), a Constitution Bench held that courts have a limited power to modify awards, including post-award interest where the circumstances justify it. So an unreasonably high post-award rate may be reduced, but a reasonable one will usually stand.

Preparing an interest claim

Interest on interest

A recurring question is whether post-award interest can run on a sum that already includes pre-award interest, which amounts to interest on interest. In Hyder Consulting (UK) Ltd v Governor, State of Orissa (2015), the Supreme Court held that it can: the "sum" directed to be paid by the award under Section 31(7)(b) includes the pre-award interest awarded under Section 31(7)(a), so post-award interest runs on the total. Later decisions have applied this reading, while noting that the award and the contract may provide otherwise.

Compound interest during the pre-award period is a different question. Tribunals generally award simple interest for that period unless the contract provides for compounding, the parties' course of dealing supports it, or a statute requires it, as the MSMED Act does for micro and small enterprise suppliers.

MSME interest in arbitration

Where the supplier is a micro or small enterprise registered under the MSMED Act when it made the supply, Section 16 of the Act entitles it to compound interest with monthly rests at three times the bank rate notified by the Reserve Bank, from the day after the payment was due under Section 15. This applies regardless of what the contract says, and the Facilitation Council, or an arbitrator deciding the supplier's claim, must award it. At a bank rate of 5.75%, as notified from 7 October 2026, the statutory rate is 17.25% a year, compounded monthly. The rate changes when the bank rate changes, so the calculation must use the rate in force for each period.

Because compounding is monthly, MSME interest grows quickly. At current rates, a ₹10 lakh claim left unpaid for three years grows to about ₹16.7 lakh with interest. Respondents should check carefully whether the supplier really was registered at the time of supply, since claims for supplies made before registration are on uncertain ground while a larger bench of the Supreme Court considers the question. See MSME delayed payment and MSME interest calculator.

Interest on deposits and part payments

When the losing party pays part of the award, the question arises whether the payment is adjusted first against interest or against principal. The general rule in execution, applied by the Supreme Court in decisions under Order XXI Rule 1 of the CPC, is that a payment is appropriated first towards interest and costs, and then towards principal, unless the parties agree otherwise or the payment is made towards principal with the award holder's consent. This affects how much interest continues to run.

When the losing party deposits the award amount in court as a condition of a stay, interest generally stops running on the amount deposited, to the extent the award holder is permitted to withdraw it. If the award holder is not allowed to withdraw, courts have considered whether interest should continue, and the answer depends on the order. It is worth asking the court to address interest expressly when making a deposit order.

Interest and the Section 34 challenge

Interest is a common target in Section 34 challenges. A respondent may argue that the tribunal ignored a contractual bar, applied an excessive rate, awarded compound interest without basis, or awarded interest on amounts not due. Courts examine these arguments within the limits of Section 34: an award of interest contrary to an express contractual bar may be set aside as contrary to the contract, while a rate within the tribunal's discretion is rarely disturbed.

After Gayatri Balasamy (2025), a court that finds the post-award interest rate unjustified may modify it rather than setting aside the whole award, which keeps the main award intact. For claimants, this is a reason to give the tribunal a clear basis for the rate claimed.

Government contracts and interest

Many government and public sector contracts contain clauses saying that no interest is payable on amounts withheld, on security deposits, on earnest money, or on any amounts due to the contractor. After UoI v L&T (2026), tribunals must respect these clauses for the pre-award period. Contractors should read the clause closely: a bar on interest on security deposits does not necessarily bar interest on unpaid running bills, and a bar on interest on "amounts payable under the contract" may not cover a damages claim for breach. See government contract arbitration.

Choosing a rate when the contract is silent

Where the contract says nothing about interest, the tribunal chooses a reasonable rate. Tribunals commonly look at the rates at which commercial banks lend to businesses, the claimant's actual cost of borrowing if proved, the rate at which the respondent itself borrowed, and the period of delay. Rates between 9% and 12% a year simple are common in domestic commercial arbitrations, but there is no fixed figure, and a claimant who proves a higher cost of funds may get more.

A claimant who wants a particular rate should give evidence for it: bank loan sanction letters, statements showing interest paid on working capital, or expert evidence on market rates. A bare claim for 18% or 24% without any basis is often reduced.

Mistakes to avoid

Claiming interest from the date of the contract rather than from each payment's due date. Using a single rate for the whole period when the contract or statute changes the rate. Forgetting to claim post-award interest expressly, so that only the statutory default applies. Ignoring a contractual bar and then losing the interest component on challenge. Treating an MSME claim as ordinary interest when the supplier was registered, or claiming MSME interest when it was not. And failing to update the calculation at the execution stage, so that interest to date is not claimed.

Calculating interest accurately

Prepare a schedule listing each invoice or payment milestone, its due date, any part payments with dates, the rate applicable, and interest to the claim date, with a running total. For post-award interest, calculate from the award date to the payment or filing date. For MSME claims, apply monthly compounding and the bank rate in force for each period. Use a spreadsheet the tribunal can check, and attach the formula used. Clear calculations are rarely challenged; confusing ones invite disputes.

Related guides

See how to enforce an arbitration award for recovering interest in execution, arbitration cost in India for costs, and MSME 45-day rule for when MSME interest starts.