Free tool
MSME Late Payment Interest Calculator
When a buyer pays an MSME supplier late, the MSMED Act mandates compound interest at three times the RBI bank rate. Plug in invoice and payment dates to see what is owed.
- Payment due date
- 08 Apr 2026
- Days overdue
- 45 days
- Months overdue
- 1.48
- Principal
- ₹ 5,00,000.00
- Interest @ 19.5% p.a.
- ₹ 12,057.88
- Total payable
- ₹ 5,12,057.88
A worked example, end to end
A real scenario, calculated step by step, so you can validate the result against your books before raising the interest claim.
Scenario
An MSME supplier raises an invoice of ₹5,00,000 on 1 March 2026. The written agreement is for 30-day credit. The buyer eventually pays on 15 August 2026.
- Invoice date
- 01 Mar 2026
- Agreed payment days
- 30 days
- Due date
- 31 Mar 2026
- Actual payment date
- 15 Aug 2026
Computation
- Days overdue. 31 Mar 2026 to 15 Aug 2026 = 137 days.
- Months overdue. 137 / 30.44 = 4.50 months.
- Annual interest rate. 3 × 6.5% RBI bank rate = 19.5% p.a.
- Monthly compounding factor. (1 + 0.195 / 12)4.50 = 1.0759.
- Total payable. ₹5,00,000 × 1.0759 = ₹5,37,950.
- Interest owed to the MSME. ₹5,37,950 − ₹5,00,000 = ₹37,950.
The ₹37,950 is statutory. It is non-waivable, even if the contract says otherwise, and the buyer cannot claim it as a business expense under Section 23 of the MSMED Act.
Free download
MSME late payment demand letter (Word).
A fill-in-the-blanks demand letter for MSME suppliers to send the buyer. Cites Section 15-16 of the MSMED Act, shows the interest computation, and gives the buyer 15 days to settle before MSEFC is approached.
How MSME interest is calculated
Under the Micro, Small and Medium Enterprises Development Act 2006:
- Section 15. Maximum agreed credit period is 45 days from acceptance. If no period is agreed in writing, the default is 15 days.
- Section 16. If the buyer fails to pay by the due date, compound interest applies at three times the RBI bank rate, compounded with monthly rests.
- Section 22. Buyers with any outstanding MSME dues over 45 days must disclose them in the annual financial statements.
- Section 23. The interest paid is not deductible as a business expense for income tax. Doubles the real cost of delay.
Interest = Principal × (1 + r/12)^n − Principal
r = 3 × RBI bank rate, n = months overdue
"From which date" does interest accrue?
From the day after the appointed day (the due date). The "appointed day" is the agreed date in writing, capped at 45 days from acceptance, or the 15th day after acceptance if no written agreement exists. "Acceptance" means the day the buyer takes delivery, or if a defect is recorded in writing, the day the defect is removed.
What if the supplier is not Udyam-registered at invoice date?
Section 16 protection applies only to suppliers who are registered as a Micro or Small enterprise on the Udyam portal at the time the supply was made. Medium enterprises are excluded from Section 15-16, although they retain other MSMED Act remedies. Always check Udyam status as of the invoice date, not as of dispute.
MSMED interest FAQ
Common questions.
What is the interest rate for late payments to MSME suppliers?
Three times the RBI bank rate, compounded monthly. The RBI bank rate is currently 6.5%, which makes the MSMED interest rate 19.5% per annum. The rate is set by Section 16 of the MSMED Act 2006 and applies automatically once the payment crosses the appointed day.
From which date does MSME interest start accruing?
From the day after the appointed day. The appointed day is the date agreed in writing (capped at 45 days from the day of acceptance) or, if no written agreement exists, the 15th day after acceptance. Acceptance is the day the buyer takes delivery, or the day a written-recorded defect is removed.
What is the 45-day payment rule under the MSMED Act?
Section 15 caps the agreed credit period at 45 days from the day of acceptance of goods or services. Any contract term that goes beyond 45 days is void to that extent; Section 15 overrides the contract. If the buyer does not pay by the appointed day, Section 16 interest kicks in automatically.
Is the interest simple or compound?
Compound, with monthly rests. The formula is A = P × (1 + r/12)^n where P is principal, r is the annual rate (3x RBI bank rate), and n is the number of months overdue. Monthly compounding means the previous month's interest is added to the principal before the next month's interest accrues.
How do I calculate MSME interest with an example?
For a ₹5,00,000 invoice dated 1 March 2026 with 30-day terms, paid on 15 August 2026: due date is 31 March, days overdue is 137, months overdue is 4.50. Interest at 19.5% compounded monthly = ₹5,00,000 × ((1 + 0.195/12)^4.50 − 1) = ₹37,950. The buyer pays ₹5,37,950 in total.
Is the interest tax-deductible for the buyer?
No. Section 23 of the MSMED Act disallows the interest as a deduction under the Income Tax Act. The buyer pays the interest AND cannot reduce taxable income with it. At a 25% effective tax rate, the disallowance adds another ~25% on top of the interest, making the true cost of delay closer to 25% per annum.
What can MSME suppliers do if the buyer ignores the demand?
File a complaint with the Micro and Small Enterprise Facilitation Council (MSEFC) in the state where the supplier is located. The Council must dispose of the complaint within 90 days. The Council's award is enforceable as a civil-court decree. Independently, the supplier can also approach a civil court, although MSEFC is faster.
Does it apply to government buyers and PSUs?
Yes. The MSMED Act binds Central and State government departments, PSUs and any other buyer. PSUs are also required to upload their MSME outstanding on the SAMADHAAN portal every month. Government buyers are not exempt from the 45-day rule or the Section 16 interest.
Where can I find the MSMED Act 2006 PDF?
The full text is on the Ministry of MSME website (msme.gov.in) and on the India Code repository (indiacode.nic.in). Sections 15 to 24 are the chapter on delayed payments. Section 22 (disclosure) and Section 23 (tax non-deductibility) often surprise buyers, so worth reading those in full.
Can the contract waive Section 16 interest?
No. Section 16 begins with "Notwithstanding anything contained in any agreement…", which means it overrides contract terms. A buyer cannot insist on a no-interest clause or a lower rate; the statute is unwaivable. Suppliers may, however, choose not to claim the interest as a commercial decision.
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MSME compliance, automated.
OneFinOps tracks every vendor's Udyam status, flags overdue MSME invoices before the 45-day deadline, computes Section 16 interest as part of the AP close, and generates the Section 22 annual disclosure. The calculator is a snapshot. The platform stays current.