Guide · India payment compliance
The MSME 45-day payment rule, explained.
Pay a micro or small supplier late and two things happen: penal interest starts compounding under the MSMED Act, and your income-tax deduction gets deferred under Section 43B(h). Here's how both clocks work, what the interest actually costs, and how to stay clean.
The rule in one paragraph
Under Section 15 of the MSMED Act, 2006, a buyer must pay a micro or small enterprise by the agreed date — and the agreement cannot exceed 45 days from acceptance of the goods or services. With no written agreement, the limit is 15 days. Miss it, and Section 16 charges compound interest (monthly rests) at three times the RBI bank rate. Since FY 2023-24, Section 43B(h) of the Income-tax Act adds a second penalty: amounts still unpaid past the Section-15 deadline at year-end are not deductible until the year you actually pay.
The two clocks
| Situation | Payment deadline | Clock starts |
|---|---|---|
| Written agreement with the supplier | Agreed credit period, capped at 45 days | Day of acceptance — or deemed acceptance if you don't object in writing within 15 days of delivery |
| No written agreement | 15 days |
Two details trip buyers up: the clock runs from acceptance, not the invoice date — and a PO with "payment: 60 days" doesn't help you; anything beyond 45 is read down to 45.
What late payment actually costs — a worked example
Say you owe a small-enterprise supplier ₹10,00,000 on 45-day terms and pay 30 days late. With the RBI bank rate at an illustrative 6.25%, the MSMED rate is 3 × 6.25% = 18.75% a year, compounded with monthly rests:
- Interest for the month: ₹10,00,000 × 18.75% ÷ 12 ≈ ₹15,625 — and it compounds every month the invoice stays unpaid.
- That interest is never deductible for income tax (Section 23, MSMED Act) — it's pure cost.
- If the amount was still unpaid past its deadline at year-end, the ₹10L deduction defers to the year you pay (Section 43B(h)) — at a 25–30% effective rate, that's ₹2.5–3L of tax cash-flow pulled forward.
The asymmetry to remember: paying on day 46 instead of day 44 doesn't cost you 2 days of interest — it can cost a full deduction deferral plus non-deductible compound interest. The clock, not the amount, is what needs watching.
Who's covered — and who isn't
- Covered: dues to Udyam-registered micro and small enterprises — manufacturers and service providers.
- Not covered by 43B(h): medium enterprises, and wholesale/retail traders (their Udyam registration is for priority-sector lending only).
- Unregistered suppliers: 43B(h) applies to registered micro/small enterprises — but status changes, so keep current Udyam declarations on your vendor master.
Why this slips through in practice
Most buyers track payment terms in Tally or Excel from the invoice date, with no per-supplier Udyam status and no view of the acceptance date. Typical setups don't watch the Section-15 clock at all — the miss surfaces at audit time, when the interest has been compounding for months and the year-end disallowance is already fact.
Staying clean: what a working system needs
- Udyam status on the vendor master — micro/small/medium/trader, with the declaration on file and a refresh cadence.
- The clock from acceptance — tied to the GRN, not the invoice PDF.
- An aging view sorted by days-to-deadline, not days-since-invoice.
- Computed exposure — interest accruing per invoice, and what's at stake at year-end.
- An alert while there's still time to act — not a report after the deadline has passed.
TradeOps watches this clock for you
Udyam status on the vendor master, the 45/15-day clock from GRN acceptance, computed interest exposure, and alerts with days left to act — built into procurement, not bolted on as a report.
See plans & join the pilotQuick answers
Does Section 43B(h) apply to medium enterprises?
No. Section 43B(h) covers dues to micro and small enterprises only. Purchases from medium enterprises are outside its scope — though the MSMED Act's interest provisions still apply to registered suppliers as defined by the Act.
Does Section 43B(h) apply to purchases from traders?
Generally no. Wholesale and retail traders are registered on Udyam only for priority-sector lending benefits, so dues to them are generally treated as outside Section 43B(h). Confirm each supplier's Udyam category with your CA.
What if the supplier is not Udyam-registered?
Section 43B(h) applies to dues to registered micro and small enterprises. If a supplier is not Udyam-registered on the relevant date, the clause does not bite for that purchase — but registration status changes, so collect and refresh Udyam declarations on the vendor master.
This guide is educational, not tax or legal advice; positions on 43B(h) continue to evolve through circulars and case law — confirm treatment with your chartered accountant. Primary sources: MSMED Act 2006 §§2(b), 15, 16, 23 (msme.gov.in) and Income-tax Act §43B(h) via Finance Act 2023 (incometaxindia.gov.in). Law as stated on 6 July 2026; the RBI bank rate in the example is illustrative — use the current notified rate.