How it is calculated
When a buyer pays a micro or small supplier late, s.16 of the MSMED Act 2006 makes it liable to pay compound interest, with monthly rests, at three times the Bank Rate notified by the Reserve Bank, whatever the contract says.
Annual rate r = 3 × RBI Bank Rate
Interest = P × [(1 + r ÷ 12)m × (1 + r × d ÷ 365) − 1]
where P = amount unpaid, m = whole months from the due date to payment, d = the remaining days
With part payments: each month's interest is added to the balance at the month's rest; a payment during a month is applied to accrued interest first (or principal first, as you choose) and interest runs on the reduced balance from that day
Where each rule comes from
- Due date, s.15 and s.2(b): payment on or before the agreed date, which cannot be more than 45 days from the day of acceptance or deemed acceptance; with no written agreement, before the appointed day, the day after 15 days from acceptance. Goods or services are deemed accepted on delivery if the buyer raises no written objection within 15 days (MSMED Act 2006, indiacode.nic.in).
- Interest, s.16: compound interest with monthly rests at three times the Bank Rate, from the appointed day or the day after the agreed date, notwithstanding any agreement. The Act does not say how a part payment is applied, or whether the rate moves when the Bank Rate changes; this calculator uses one rate and lets you choose the order.
- Bank Rate: 5.75% after the RBI Monetary Policy Statement of 7 October 2026 (repo rate 5.50%), so the interest rate is 17.25% a year. It is an input here: check rbi.org.in for later changes.
- Tax, s.23: interest payable or paid under s.16 is not allowed as a deduction in computing income.
- Tax, s.37(2)(g) [43B(h)]: a sum payable to a micro or small enterprise beyond the s.15 limit is deductible only in the year it is actually paid, with no grace to the return due date. Use the MSME payment tracker for the year-end add-back across a ledger, and the 45-day payment rule guide for MSME-1 and the accounts disclosure.
Worked example
Round illustrative numbers, the same as the guide. A small-enterprise supplier's goods worth ₹10,00,000 are accepted on 16 September 2026 under a written 45-day agreement, so payment is due on 31 October 2026. The buyer pays on 31 January 2027. Bank Rate 5.75%, so 17.25% a year, 1.4375% a month.
| Month | Opening (₹) | Interest at 1.4375% (₹) | Closing (₹) |
|---|---|---|---|
| November 2026 | 10,00,000.00 | 14,375.00 | 10,14,375.00 |
| December 2026 | 10,14,375.00 | 14,581.64 | 10,28,956.64 |
| January 2027 | 10,28,956.64 | 14,791.25 | 10,43,747.89 |
Interest for 92 days late is ₹43,748. If the buyer had paid ₹4,00,000 on 10 December 2026 with no written agreement (due 1 October 2026) and the rest on 31 March 2027, the calculator shows ₹67,784 of interest, of which ₹33,333 was cleared by the part payment when it is applied to interest first.
Points to confirm
The protection covers suppliers registered on Udyam as micro or small enterprises (manufacturing or services) on the date of supply; medium enterprises are outside ss.15 to 24, and traders are generally treated as outside. Disputes go to the Micro and Small Enterprises Facilitation Council (MSME Samadhaan). K-Finance handles books, GST, TDS and payables in one workspace.
Common questions
What is the interest rate on delayed MSME payments?
Three times the Bank Rate notified by the RBI, compounded with monthly rests. With the Bank Rate at 5.75% after the 7 October 2026 policy, that is 17.25% a year or 1.4375% a month.
From which date does MSME interest start?
From the day after the due date: the agreed date where there is a written agreement (never more than 45 days from acceptance), or the day after 15 days from acceptance where there is none.
Can the contract set a lower interest rate?
No. Section 16 applies notwithstanding anything in any agreement between the buyer and supplier or in any other law.
Is MSME delayed payment interest tax-deductible?
No. Section 23 of the MSMED Act says interest payable or paid under s.16 is not allowed as a deduction for income tax. Separately, the late principal itself is deductible only when paid under s.37(2)(g) [43B(h)] of the Income-tax Act 2025.
Does the rate change when the RBI changes the Bank Rate?
The Act does not settle it. Many buyers apply the rate in force for each month of delay; this calculator uses one rate that you enter, so run it in parts if the rate changed during the delay.