MSME 45-Day Payment Rule Explained for Buyers

If your business buys goods or services from micro or small enterprises, Section 15 of the MSMED Act sets a hard limit on how long you can take to pay. You must pay by the date agreed in writing, and that date cannot be more than 45 days from the day you accepted, or are deemed to have accepted, the goods or services. If there is no written agreement on payment, you must pay within 15 days of acceptance. Paying late carries compound interest at three times the RBI bank rate, which cannot be waived by contract, and the late payment may not be deductible for income tax in the year you claim it.

This guide is for finance heads, accountants, procurement teams and business owners who buy from MSMEs. In short: identify which suppliers are registered micro or small enterprises; fix payment terms of 45 days or less from acceptance; record any rejection in writing within 15 days of delivery; and pay on time, because the interest, the tax disallowance and the risk of a council claim together make late payment expensive.

The rule has existed since 2006, but the 2024 tax change made it a board-level issue for many companies.

The rule in plain words

Section 15 says that where a supplier supplies goods or renders services to a buyer, the buyer must make payment on or before the date agreed between them in writing, or, where there is no agreement, before the "appointed day". The proviso adds that the period agreed in writing shall in no case exceed 45 days from the day of acceptance or the day of deemed acceptance.

The "appointed day", defined in Section 2(b), is the day following the expiry of 15 days from the day of acceptance or deemed acceptance. So without a written agreement, payment is due within 15 days of acceptance. With a written agreement, payment is due on the agreed date, but a contract that says 60, 90 or 120 days does not extend the legal limit beyond 45 days.

"Day of acceptance" means the day the goods are actually delivered or the services rendered. If the buyer objects in writing to the goods or services within 15 days of delivery, acceptance is the day the supplier removes the objection. If the buyer does not object in writing within 15 days, it is deemed to have accepted on the day of delivery.

Working out the due date

What late payment costs

Interest. Under Section 16, if the buyer fails to pay within the time required by Section 15, it must pay compound interest with monthly rests to the supplier, at three times the bank rate notified by the RBI, from the appointed day or the day after the agreed date. With the bank rate at 5.75% from 7 October 2026, that is 17.25% a year, compounded every month. Section 16 applies notwithstanding any agreement, so a contract clause excluding or reducing interest does not help the buyer.

No deduction for the interest. Section 23 of the MSMED Act says interest payable under Section 16 is not allowed as a deduction in computing income tax.

Tax disallowance of the purchase itself. From the assessment year 2024-25, Section 43B(h) of the Income-tax Act, 1961 provided that any sum payable to a micro or small enterprise beyond the Section 15 time limit is deductible only in the year of actual payment. Under the Income-tax Act, 2025, which applies from 1 April 2026, the same rule is in Section 37(2)(g). Unlike some other items in that provision, there is no relief for paying before the return filing date: if the payment is late under Section 15, the deduction moves to the year of payment.

Disclosure. Section 22 requires buyers whose accounts are audited to disclose in their annual accounts the principal and interest remaining unpaid to micro and small suppliers, interest paid, and interest due. Companies also file half-yearly returns with the Registrar of Companies on outstanding MSME dues beyond 45 days.

Who counts as an MSME supplier

Building a compliant payment process

Common questions from buyers

What if the supplier agreed to longer terms? A written agreement of more than 45 days does not change the legal maximum. Interest runs from day 46, and the tax rule applies from day 46.

What if the goods were defective? Object in writing within 15 days of delivery. Acceptance then shifts to when the supplier removes the objection. An objection raised later does not move the acceptance date.

What about advance payments and retention? The rule concerns payment for goods or services supplied. Retention money held under the contract has been the subject of differing views; where retention is released later as the contract provides, the treatment should be checked with advisers.

Can the supplier waive interest? A settlement signed after the dispute may bind a supplier in some cases, but a clause in the original contract waiving Section 16 interest is not effective.

What if the supplier is not registered? The 45-day rule under the MSMED Act and the tax rule apply to registered micro and small enterprises. Ask for registration details; from 15 October 2026, registration is free and voluntary but benefits depend on it.

What happens if a supplier files a claim

A micro or small supplier that is not paid on time can file a claim before the Facilitation Council of its state, through the online portal. The council can decide the claim even if your contract has an arbitration clause, as the Supreme Court held in Mahakali Foods (2022). If conciliation fails, the council arbitrates and passes an award, usually including Section 16 interest. To challenge the award in court, you must deposit 75% of it first.

For buyers, the practical message is that council claims are best settled early, ideally at conciliation, where interest can often be negotiated. See defend an MSME claim.

Services, milestones and the 45 days

For goods, acceptance is usually tied to delivery. For services, it is less obvious. The Act treats the day of acceptance as the day the services are actually rendered, subject to the same 15-day objection rule. So for a monthly maintenance contract, a consultancy assignment or a software development milestone, the clock usually starts when the service for that period or milestone is completed, not when the buyer gets around to approving the invoice.

Buyers sometimes build long internal approval processes for service invoices, such as sign-off by the user department, then procurement, then finance. These internal steps do not extend the legal period. If a buyer wants more time to check a service, it must raise a written objection within 15 days of the service being rendered, stating what is wrong. A vague request for "more information" may not count as an objection.

For milestone contracts, define acceptance clearly in the contract, with a short review period and deemed acceptance if no written rejection is given. That protects both sides and makes the due date easy to calculate.

Group purchases, agents and intermediaries

The 45-day rule applies to the "buyer", meaning whoever buys goods or receives services from the supplier for consideration. In practice, supply chains often involve distributors, contract manufacturers, EPC contractors and group procurement companies. The buyer is generally the entity that places the order and is liable to pay under the invoice.

If your group uses a central procurement company that places orders on behalf of operating companies, the procurement company is likely to be the buyer for MSMED purposes, and its own payment terms must comply. If you buy through an agent who pays the supplier and then bills you, the agent may be the buyer. Getting this right matters both for the interest risk and for the tax rule, which applies to the assessee that claims the expense.

Reconciling the books at year-end

Because of the tax rule, the year-end close needs an MSME review. A practical checklist: extract all invoices from suppliers flagged as micro or small in the vendor master; compute the due date for each, using the acceptance date and the agreed period capped at 45 days; identify invoices outstanding beyond the due date at year-end and invoices that will become overdue before payment; quantify the amount that will be disallowed under Section 37(2)(g) if not paid by the due date; and quantify Section 16 interest accrued.

Tax auditors report on MSME payments in the tax audit report, so this information will be needed anyway. Supplier classification should be checked against Udyam records, because suppliers move between micro, small and medium as they grow, and the revised thresholds from 1 April 2025 changed many classifications.

Negotiating with MSME suppliers who agree to longer terms

Some large buyers ask MSME suppliers to sign letters agreeing to 60 or 90 days' credit, or to waive interest under Section 16. These letters do not change the law. Section 15's 45-day cap and Section 16's interest apply notwithstanding any agreement. A supplier that signs such a letter can still claim interest from day 46 before the council, and the buyer's tax deduction is still affected.

Buyers who need longer working capital cycles have lawful options: pay MSME suppliers within 45 days through TReDS platforms, where a financier pays the supplier early and the buyer pays the financier later; use supply chain finance arranged by the buyer's bank; or restructure supply arrangements so that payment milestones fall within 45 days. From 15 October 2026, Central Public Sector Enterprises must route settlement of MSME procurement invoices through TReDS under the new Section 15A.

Penalties for non-disclosure

Section 22 requires buyers whose accounts are audited to disclose unpaid amounts and interest due to micro and small suppliers in their annual accounts. The MSMED (Amendment) Act, 2026, in force on this point from 15 October 2026, revised the penalty provisions and introduced an adjudication and appeal framework. According to published summaries, a buyer contravening Section 22 faces a warning first, then penalties of ₹10,000 to ₹50,000 on a second contravention and ₹50,000 to ₹1 lakh for later contraventions, with the Development Commissioner as adjudicating officer and appeals to be decided within 60 days. Check the notified text and rules before relying on specific amounts.

How the rule interacts with GST and TDS

The 45-day rule sits alongside other compliance obligations. Under GST law, a buyer who does not pay the supplier within 180 days of the invoice must reverse the input tax credit claimed, with interest, and can reclaim it on payment. Under the income tax rules, tax deducted at source on payments to suppliers must be deposited on time. None of these change the MSMED deadline, but they show that payment delays carry costs on several fronts at once.

For suppliers, these records help prove acceptance. A buyer that claimed input tax credit on your invoice in its GST return, or deducted TDS on your payment, has treated the invoice as a valid liability in its own filings. That is strong evidence before a council if the buyer later disputes the supply.

What changed in 2024 and 2026

The 45-day rule has been in the MSMED Act since 2006, along with Section 16 interest. For years, enforcement was weak, because suppliers hesitated to file claims against large customers. Two changes made it more effective. From the assessment year 2024-25, Section 43B(h) of the Income-tax Act, 1961 linked the buyer's tax deduction to timely payment, which brought MSME payments into every tax audit. And the MSME ODR portal, live since June 2025, made it easier for suppliers to file claims without travelling.

The MSMED (Amendment) Act, 2026, in force in part from 15 October 2026, added the TReDS requirement for CPSEs, revised penalties for non-disclosure, and made registration free and voluntary. The Income-tax Act, 2025, from 1 April 2026, carried the 43B(h) rule into Section 37(2)(g). The direction of travel is clear: paying MSMEs on time is becoming a standard compliance expectation for every business that buys from them.

A short policy for your procurement team

A simple written policy helps. It can say: all suppliers must declare their Udyam status at onboarding and annually; payment terms for micro and small suppliers will not exceed 45 days from delivery; goods will be inspected and any objection raised in writing within 10 working days of delivery; invoices from micro and small suppliers will be flagged in the accounting system with their due dates; and the finance head will review overdue MSME invoices weekly and before each quarter-end and year-end.

Share the policy with procurement, stores and accounts teams. Most late payments to MSMEs are not deliberate; they result from slow internal approvals and unclear responsibility. A clear process removes most of the risk.