Late Payment and Interest Clauses in India: The MSME 45-Day Rule

A late payment interest clause fixes what a buyer owes for paying an invoice late: a rate, a date interest starts running, and how it compounds. The one thing most people get wrong is treating this as pure negotiation. For one category of supplier, a registered micro or small enterprise, India's law fixes the rate itself, at a level far above anything a commercial clause would normally set, and no contract term can lower it. (Adira, which publishes this guide, makes contract review and CLM software, so it has a commercial stake in you signing more contracts. This page is written to stand on its own.) Below is the exact statutory wording, a Supreme Court ruling on how hard that interest bites once it becomes an award, the tax lever most buyers do not see coming, and the mechanics that decide whether your clause is enforceable or quietly overridden by law.

Plain meaning

A late payment interest clause, sometimes standalone, sometimes folded into payment terms, says three things: the rate once payment is overdue, the date interest starts, and whether it compounds and how often. Between two large companies this is ordinary drafting; 12-18% per annum simple interest is common, and courts generally enforce whatever rate the parties agreed, unless it is so extravagant it reads as a penalty.

That changes the moment the supplier is a registered micro or small enterprise under the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act). For that one category of counterparty, India fixes the rate by statute, at three times the RBI's bank rate, compounded monthly, and makes a weaker contract term ineffective to that extent.

Who it protects and what triggers it

For a registered micro or small enterprise supplier (medium enterprises sit outside this protection), the clause is almost a formality: Section 16 applies automatically the moment payment is late, whatever the contract says. For every other supplier, unregistered vendors, large companies, foreign counterparties, the written clause is the entire remedy; if silent, pursuing interest usually means asking a court for it as damages, slower and less certain than a clean contractual rate.

The trigger is the payment due date, set by the payment terms clause: invoice date, delivery, or acceptance, or, for a registered MSE supplier, the Section 15 default of 15 days from acceptance with no written agreement, capped at 45 days in any case. Interest runs from the day after, with no demand letter needed. See our payment terms guide and the MSME 45-day payment rule for what sets that date.

What to look for

Four things decide how much an interest clause actually protects a supplier, or exposes a buyer.

1. Is there a rate at all. No stated consequence for missing the due date leaves the unpaid party's only automatic remedy as whatever statute independently supplies, or, for anyone else, a damages claim that has to be argued rather than calculated.
2. Above or below the MSME floor. 12% simple interest is enforceable against a non-MSME counterparty. Against a registered MSE supplier it is beside the point: Section 16 applies "notwithstanding anything contained in any agreement," so the statutory rate, usually well above 12% once compounded monthly, applies regardless.
3. Simple or compound, how often. Monthly-rest compound interest grows faster than simple interest at the same headline rate. "12% per annum" alone is usually read as simple, materially weaker than the MSMED default.
4. Does it try to disclaim or cap interest. "No interest shall accrue" or a fixed cap is enforceable against a non-MSE supplier who agreed to it, and void to the extent it conflicts with Section 16 against a registered MSE supplier.

A quick test: does the clause name a rate, say whether it is simple or compound, and avoid language that disclaims interest altogether? Then check the supplier's Udyam registration date; that answer decides which regime governs.

The Indian position: Sections 15 and 16 of the MSMED Act

Section 15 sets the deadline Section 16's penalty is built on:

"Where any supplier supplies any goods or renders any services to any buyer, the buyer shall make payment therefor on or before the date agreed upon between him and the supplier in writing or, where there is no agreement in this behalf, before the appointed day: Provided that in no case the period agreed upon between the supplier and the buyer in writing shall exceed forty-five days from the day of acceptance or the day of deemed acceptance."

Source: Section 15, MSMED Act, 2006 (Indian Kanoon)

Section 16 is the interest hammer, unusually strong for Indian commercial law:

"Where any buyer fails to make payment of the amount to the supplier, as required under section 15, the buyer shall, notwithstanding anything contained in any agreement between the buyer and the supplier or in any law for the time being in force, be liable to pay compound interest with monthly rests to the supplier on that amount from the appointed day or, as the case may be, from the date immediately following the date agreed upon, at three times of the bank rate notified by the Reserve Bank."

Source: Section 16, MSMED Act, 2006 (Indian Kanoon)

Three things follow. First, "notwithstanding anything contained in any agreement" means a lower or absent contract rate does not stop Section 16 applying to a registered MSE supplier. Second, the rate tracks the RBI's bank rate, which moves with policy; as of mid-2026 it sat at roughly 5.5% per annum, putting the Section 16 floor near 16.5% before compounding, and higher over a longer delay. Check rbi.org.in for the rate in force when calculating an actual claim. Third, monthly rests mean interest earns interest every month, so a year or two of delay does not grow linearly, it accelerates.

There is a tax sting on top, in two provisions. Section 23 of the MSMED Act says interest paid by a buyer under the Act is not deductible under the Income Tax Act. Source: Section 23, MSMED Act (Indian Kanoon). Separately, Section 43B(h) of the Income Tax Act, inserted by the Finance Act 2023, effective from assessment year 2024-25, disallows the deduction for the underlying invoice amount if unpaid within the Section 15 limit, pushing it to the year actually paid. Unusually, clause (h) is excluded from the proviso letting other Section 43B items qualify if paid before the return filing date, so settling late but before filing does not save this deduction. Pay an MSE supplier late, and you can lose the deduction on the invoice under Section 43B(h) and on the interest under Section 23, on the same delay.

Two things gate all of this. The supplier needs genuine, current Udyam registration, which per Supreme Court authority generally has to exist before the contract was signed, not after a dispute arises (our payment terms guide covers this). And if a buyer will not pay voluntarily, the route is the Micro and Small Enterprise Facilitation Council (MSEFC) each state sets up, reachable through the MSME Samadhaan portal at samadhaan.msme.gov.in, where a registered MSE files a delayed payment reference online against any buyer. The Council attempts conciliation, then arbitrates itself or refers the matter to arbitration under the Arbitration and Conciliation Act, 1996, aiming to decide within 90 days of taking up the reference.

Named Indian case: Tirupati Steels v Shubh Industrial Component

Tirupati Steels v Shubh Industrial Component & Anr. (Civil Appeal No. 2941 of 2022, Supreme Court, decided 19 April 2022) shows how hard Section 16 lands once it becomes an award. Tirupati Steels had claimed roughly Rs 1.40 crore in principal before the MSME Facilitation Council at Chandigarh; by the time Section 16 interest was added, the interest came to roughly Rs 1.32 crore, nearly matching the principal, a real illustration of how fast three-times-bank-rate compound interest with monthly rests grows.

When Shubh Industrial Component tried to challenge the award under Section 34 of the Arbitration Act, 1996, the Supreme Court held that Section 19's pre-deposit, 75% of the awarded amount before any challenge can even be entertained, is mandatory, not discretionary. Source: Section 19, MSMED Act (Indian Kanoon); case: Tirupati Steels v Shubh Industrial Component (Indian Kanoon). Once a delayed payment reaches the Council and becomes an award, contesting it is gated behind a large mandatory cash deposit, which is why most such disputes settle rather than get fought to a final order.

Red flags

Normal	Red flag	Why it matters
A stated interest rate and compounding method, agreed in writing	No interest clause at all: a due date but nothing said about missing it	For an MSE supplier Section 16 still applies, but silence invites needless argument; for others it can mean no entitlement at all
A rate at or above what Section 16 would produce, or an express deferral where higher	A flat 10-12% simple rate, written in without carve-out	Unenforceable to the extent it undercuts Section 16 against a registered MSE supplier
Acknowledgment that statutory overrides apply to MSME suppliers	Interest clause called the supplier's "sole and exclusive remedy"	Cannot exclude Section 16, which applies "notwithstanding anything contained in any agreement"
No cap on interest, or a cap limited to non-statutory situations	A fixed cap, e.g. "interest shall not exceed 5% of invoice value"	A cap below Section 16 does not bind a registered MSE supplier and signals the drafter ignored the Act
Silence on MSME rights, letting the statute apply where the supplier qualifies	The contract says the supplier "waives" rights under the MSMED Act	Rights under the Act are largely non-waivable given Section 16's "notwithstanding" language
Finance tracks MSME vendor status against the Section 15 clock	Accounts payable has no process to flag Udyam-registered vendors before invoices go overdue	Direct exposure to Section 43B(h) and Section 23 at year-end, without the supplier having to sue
A defined internal escalation path before a formal MSEFC reference	No escalation path; first notice is a Samadhaan portal filing	Timelines and the Section 19 deposit rule start working against the buyer; early settlement is usually cheaper

Bad clause → better clause

Bad: "Interest on any late payment shall be charged at 12% per annum, simple interest, calculated from the date the payment is 30 days overdue. This is Vendor's sole remedy for late payment, and no other interest, penalty, or compensation shall be payable under this Agreement."

What is wrong: 12% simple interest capped as a sole remedy is exactly what Section 16 overrides against a registered MSE supplier; "sole remedy" does nothing to stop the statutory rate, and the clause gives buyers false comfort about their real exposure.

Better: "Late payment shall bear interest at 1.5% per month, compounded monthly, from the day after the due date under Clause [payment terms]. Where Vendor is a registered micro or small enterprise under the MSMED Act, 2006, interest shall instead be calculated under Section 16 of that Act (compound interest, monthly rests, three times the RBI's notified bank rate) if higher, and nothing in this Clause limits or is intended to limit Vendor's rights under Sections 15 and 16 of that Act. Client acknowledges that interest paid to a registered micro or small enterprise supplier may not be deductible under Section 23 of the MSMED Act, 2006, and unpaid amounts owed to such a supplier beyond the Section 15 time limit may be disallowed under Section 43B(h) of the Income Tax Act, 1961, until actually paid."

What changed: a real default rate instead of a token 12%; an express deferral to Section 16 where it is higher instead of a cap; the "sole remedy" trap removed; and the Section 23 and 43B(h) tax exposure named in the clause itself.

How it interacts with related clauses

• Payment terms. The interest clause is only as good as the due date it attaches to; an undefined "acceptance" trigger lets the buyer control when interest starts, whatever the rate says. See our payment terms guide and the MSME 45-day payment rule.
• Termination for cause. Repeated Section 16 interest is a stronger termination ground than one missed invoice; name a threshold (two consecutive late payments, or a cumulative amount) rather than relying on general "material breach" language.
• Indemnity and limitation of liability. A liability cap drafted broadly enough to catch "all amounts payable under this Agreement" can accidentally sweep in statutory interest, which Section 16 does not let a contract limit against a registered MSE supplier; check the cap carves this out.

You can check whether your interest clause sits above or below the MSME statutory floor, free, in Weave, before you sign it or push back on one you have been sent.

US and global contrast

The US has no federal equivalent cutting across private contracts. Late-payment interest is whatever the contract sets; where silent, state law typically supplies a prejudgment rate, commonly 5-10% per annum, nowhere near India's compounding. A federal Prompt Payment Act covers only the US government's own contractor payments.

The UK's Late Payment of Commercial Debts (Interest) Act 1998 is closer: it implies the Bank of England base rate plus 8 percentage points into silent contracts, across business contracts generally, not one protected supplier category, and generally does not compound. India multiplies a reference rate by three and compounds monthly instead of adding a fixed margin, narrower in who it protects but far more aggressive once it applies, and it cannot be displaced by a lower contractual rate.

FAQ

What interest rate applies if my contract is silent on late payment to an MSME supplier? Section 16 applies automatically: compound interest, monthly rests, at three times the RBI's notified bank rate, from the day after the Section 15 due date. Silence just means the buyer has no contractual rate to point to instead.

Can a contract legally set a lower interest rate than the MSMED Act for a registered MSE supplier? It can state one, but it is not enforceable against a registered MSE supplier to the extent it undercuts Section 16, which applies "notwithstanding anything contained in any agreement." The supplier can still claim the statutory rate.

Does the 45-day rule and Section 16 interest apply to services, or just goods? Both. Section 15 covers a buyer who "supplies any goods or renders any services," so a registered micro or small enterprise service provider gets the same protection as a goods supplier.

What is Section 43B(h) and how is it different from Section 16 interest? Section 16 makes the buyer pay interest to the supplier. Section 43B(h) separately disallows the buyer's own tax deduction for the unpaid expense until it is actually paid, if it stayed unpaid past the Section 15 deadline at year-end. One is a payment to the supplier, the other a tax cost to the buyer, and both can apply to the same delay.

How do I actually file a claim for unpaid MSME interest? File a delayed payment reference directly on the MSME Samadhaan portal, run through the Facilitation Council system, without filing a civil suit first. The Council attempts conciliation, then arbitrates or refers the matter to arbitration if that fails, with a statutory aim of 90 days from taking up the reference.

Is an unregistered supplier entitled to the statutory interest rate? No. Sections 15 and 16 protect a supplier holding Udyam registration as a micro or small enterprise, and that registration generally needs to exist before the contract was entered into. An unregistered vendor relies on whatever rate the contract itself provides.

This guide explains India's statutory late-payment interest regime: the Section 15 deadline, Section 16's three-times-bank-rate compound interest, the Section 23 and Section 43B(h) tax consequences, and how hard it bites once a Facilitation Council makes an award. It does not tell you whether your specific supplier currently qualifies, what the bank rate is on the day you calculate a claim, or whether a particular clause is enforceable on your facts; that depends on registration status, current RBI notifications, and the exact wording you signed, and is not legal advice. Talk to a lawyer or a chartered accountant before you rely on, negotiate, or enforce a late-payment interest clause in a live deal.