Waiting 60, 90 or even 120 days for a customer to pay is one of the biggest cash-flow problems facing small businesses in India. Salaries, raw material, rent and GST all have to be paid from your own pocket while your money sits with someone else. MSMED Act Section 16 was written for exactly this situation.
The good news is that this section gives eligible micro and small suppliers a statutory right to interest on delayed payment when buyers pay late. In this guide, we explain what Section 16 says, how the interest works, who can claim it and how to recover your dues.
What Is Section 16 of the MSMED Act?
Section 16 of MSMED Act, 2006 deals with the interest payable in case of delayed payments made to the qualifying MSMEs. In Section 16 of MSMED Act, 2006, a provision is made for the protection of MSME suppliers in such a way that if the buyer does not make payments on time as stipulated in Section 15 of the Act, then they have to pay compound interest at the rate of three times the bank rate announced by RBI.
The primary purpose of the MSMED Act Section 16 is to protect the small business enterprises against delays in payment.
What Does Section 16 of the MSMED Act Say?
Clause 16 provides that if the buyer fails to make payments as per MSMED Act Section 15, then it will be liable to pay interest at three times the bank rate notified by the Reserve Bank of India as compound interest with monthly rests from the appointed day. This obligation will hold irrespective of anything in the contract. Below we provide some of the important aspects in plain language form:
- Buyer’s obligation: Obligation arising due to non-payment within the period determined under Section 15.
- Nature of interest: Compound interest with monthly rests, not simple interest.
- Interest rate: Three times the bank rate notified by the Reserve Bank of India.
- Interest calculation from: Appointed day, that is, the next day after the expiry of the period of agreement/statute.
- Effect of such interest: Interest would apply notwithstanding the terms of the agreement between the buyer and supplier or any other statute. Clause 24 of the Act emphasizes on it.
Paraphrasing of the clause is provided above. Before citing the clause in legal documents, please verify its exact wording with an expert.
What Is the Interest Rate Under MSMED Act Section 16?
The rate under Section 16 is three times the bank rate notified by the RBI, compounded with monthly rests. With the Bank Rate at 5.75% since 7 October 2026, the statutory rate works out to 17.25% a year. Because the bank rate changes, always check the rate for your specific period.
| Period | RBI Bank Rate | Section 16 rate (3 x bank rate) |
| 5 December 2025 to 6 October 2026 | 5.50% | 16.50% a year |
| From 7 October 2026 | 5.75% | 17.25% a year |
Source: RBI notification dated 7 October 2026 and RBI policy announcements. Verify the latest bank rate before calculating a claim.
Two things make this rate powerful:
- It is compound, not simple. Interest is added to the principal every month and then earns further interest.
- It is statutory. You do not need a clause in your purchase order to claim it.
One practical caution: the bank rate has moved several times in recent years, so the rate for each month of delay and the way a Council or arbitrator applies it should be confirmed before you put a number in a legal notice or reference.
From When Is Interest Payable Under Section 16?
Interest is payable from the appointed day: the day after the agreed payment period ends. If there is a written agreement, that period cannot exceed 45 days from acceptance. If there is no written agreement, payment is due within 15 days. Interest then runs until the buyer actually pays.
This is where Section 15 and Section 16 work together. Let us break down the key terms:
- Date of acceptance: the day the goods are actually delivered or the services rendered.
- Deemed acceptance: if the buyer does not object in writing within 15 days of delivery, the goods or services are treated as accepted.
- Written objection: if the buyer objects in writing within 15 days, acceptance is counted only from the day the supplier removes the objection.
- Appointed day: the day immediately after the agreed period (or the 15-day period, if nothing is agreed) ends.
Note the difference between the appointed day and the agreed payment date. The agreed date is when payment is due. The appointed day is the next day, when interest begins.
| Situation | Payment due | Interest starts |
| Written agreement for 30 days | 30 days from acceptance | Day after the 30 days end |
| Written agreement for 90 days | Capped at 45 days from acceptance | Day after the 45 days end |
| No written agreement | Within 15 days of acceptance | Day after the 15 days end |
| Buyer objects in writing within 15 days | Counted from the day the objection is removed | Day after the applicable period ends |
So, no, interest does not begin after 45 days in every case. It depends on what was agreed in writing, and 45 days is the ceiling, not the default.
Relationship Between Section 15 and Section 16 of the MSMED Act
Section 15 sets the buyer’s duty to pay within a fixed time. Section 16 sets the penalty for breaking that duty: compound interest at three times the bank rate. Sections 17 and 18 then give the supplier the right to recover the amount and a forum to do it.
| Provision | What it does | Practical meaning for you |
| Section 15 | Buyer must pay by the agreed date, capped at 45 days, or within 15 days if nothing is agreed | Decides your due date |
| Section 16 | Compound interest, monthly rests, 3 x bank rate | Decides what late payment costs |
| Section 17 | Buyer liable to pay the price along with interest under Section 16 | Gives you the right to recover both |
| Section 18 | Reference of the dispute to the MSEFC | Gives you a forum |
How Is Interest Calculated Under Section 16 of the MSMED Act?
Interest is calculated on the unpaid amount at three times the RBI bank rate, compounded monthly, from the appointed day until payment. Convert the annual rate into a monthly rate, add each month’s interest to the balance, and repeat for every month of delay. Follow these steps:
- Find the outstanding principal (the unpaid invoice amount).
- Check the RBI bank rate for the period of delay.
- Multiply by three to get the annual statutory rate.
- Fix the start date: the appointed day, after confirming acceptance or deemed acceptance.
- Divide the annual rate by 12 to get the monthly rate.
- Compound each month: add the month’s interest to the balance, then charge the next month’s interest on the new balance.
- Stop at the date of payment and add up the interest.
The formula, in simple terms: Amount = Principal x (1 + annual rate / 12) raised to the number of months of delay. Interest is the Amount minus the Principal.
Simple vs compound interest. Simple interest is charged only on the original principal. Compound interest with monthly rests is charged on the principal plus interest already accrued. Over a few months the gap is small. Over a year or more, it becomes real money.
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Who Is Eligible to Claim Interest Under Section 16?
Only a supplier, meaning a micro or small enterprise that has filed its memorandum (today, Udyam Registration), can claim Section 16 interest. Medium enterprises are not covered, and wholesale or retail traders are generally treated as outside the delayed-payment chapter. Not every Udyam-registered business automatically qualifies.
| Category | Covered by Section 16? | Note |
| Micro enterprise (manufacturing or services) | Yes | Valid Udyam Registration needed |
| Small enterprise (manufacturing or services) | Yes | Valid Udyam Registration needed |
| Medium enterprise | No | Outside Chapter V |
| Wholesale or retail trader | Generally no | Admitted to Udyam for priority sector lending only, per a 2021 Ministry of MSME Office Memorandum |
| Unregistered business | Uncertain | See the registration-timing point below |
Registration timing matters. In Silpi Industries v. Kerala State Road Transport Corporation (2021) and Gujarat State Civil Supplies Corporation v. Mahakali Foods (2022), the Supreme Court indicated that a supplier should be registered at the time of the contract to claim the Act’s benefits. In January 2025, in NBCC (India) Ltd. v. State of West Bengal, a different bench said those cases did not squarely decide the point for Section 18 and referred the question to a larger bench. The law here is still developing.
What Happens If a Buyer Fails to Pay an MSME?
A buyer that misses the Section 15 deadline owes the unpaid amount plus compound interest at three times the bank rate. The supplier can recover both through the Micro and Small Enterprises Facilitation Council (MSEFC), and the buyer also faces income-tax and reporting consequences.
The main consequences are:
- Growing interest liability. The dues compound every month.
- No tax deduction for the interest. Section 23 of the MSMED Act disallows the interest as a business expense for the buyer.
- Section 43B(h) of the Income Tax Act. Payments to micro and small suppliers beyond the permitted period are deductible only when actually paid. This applies from assessment year 2024-25.
- Reporting. Companies with MSME dues outstanding beyond 45 days must report them in MSME Form 1 under Section 405 of the Companies Act, 2013.
- Recovery proceedings. The supplier can file a reference before the MSEFC.
- Appeal pressure. A buyer that wants to challenge an MSEFC award in court must first deposit 75% of the awarded amount under Section 19.
Courts have also strengthened the supplier’s hand. The Jharkhand High Court held that a claim for interest alone, after the principal was paid, can be heard by the MSEFC. The Supreme Court has held that the MSMED Act, as a special law, overrides the general Arbitration and Conciliation Act, 1996 where the two conflict. The Delhi High Court has also upheld Section 16 interest awarded in ad hoc arbitration.
How Can MSMEs Recover Delayed Payments?
A supplier can recover delayed payments by sending a written demand and then filing a reference with the MSEFC under Section 18, usually through the MSME Samadhaan portal. The Council attempts conciliation first and, if that fails, arbitrates. The Act expects a decision within 90 days.
MSME Samadhaan: the Ministry of MSME’s online portal where eligible micro and small enterprises file delayed-payment applications, which go to the relevant Facilitation Council. Not sure how to file?
Here is how the sections connect:
- Section 16 gives you the interest.
- Section 17 makes the buyer liable to pay the price along with that interest.
- Section 18 lets either party refer the dispute to the MSEFC, which is set up at the state level.
The usual path looks like this:
- Send reminders and a written demand to the buyer, quoting your Udyam registration number and the invoice details.
- File your application on MSME Samadhaan or with the MSEFC of your state. Check the portal for the current filing interface.
- Conciliation (Section 18(2)). The Council tries to settle the matter. A settlement here has the effect of an arbitral award.
- Arbitration (Section 18(3)). If conciliation fails, the Council arbitrates itself or refers the matter to an ADR institution, under the Arbitration and Conciliation Act, 1996.
- Award and enforcement. The award is enforceable like a court decree.
Be realistic about timelines. The 90-day limit is a statutory expectation, but industry reports say it is often exceeded because of heavy caseloads. Keep your documents ready and follow up.
Important Documents Required for Delayed Payment Claims
A strong claim rests on paperwork that proves four things: you are an eligible supplier, the buyer accepted your goods or services, the amount is unpaid, and the due date has passed. Keep these ready:
- Udyam Registration Certificate
- Purchase order or work order, ideally stating the payment terms
- Tax invoices
- Delivery challans or lorry receipts
- Proof of delivery or service completion
- Written acceptance or any email or message confirming receipt
- Ledger statements from your books and, if possible, the buyer’s confirmation of balance
- Payment reminders you have sent
- Correspondence with the buyer, including any objections raised
Common Questions About MSMED Act Section 16: Myths and Facts
| Question | The correct position |
| Is the interest simple or compound? | Compound, with monthly rests. |
| Can the buyer negotiate a lower rate? | A contract term cannot reduce the statutory interest, because Section 16 applies notwithstanding any agreement. A supplier may choose to settle for less, but the buyer cannot force it. |
| Can a written agreement override Section 16? | No. Section 24 gives the Act overriding effect. |
| Does interest start after 45 days in every case? | No. 45 days is the maximum agreed period. With no written agreement, it is 15 days. |
| Is interest payable on the outstanding principal? | Yes, and it compounds monthly until payment. |
| Can medium enterprises claim this? | No. Only micro and small enterprise suppliers are covered. |
| Can an MSME approach the MSEFC? | Yes, under Section 18, if it qualifies as a supplier. |
| Is the interest credited automatically? | No. The supplier has to claim it and, if the buyer refuses, pursue recovery. |
Key Takeaways
- MSMED Act Section 16 gives eligible micro and small suppliers compound interest at three times the RBI bank rate.
- Interest is compounded with monthly rests and starts on the appointed day.
- The agreed payment period can never exceed 45 days. With no written agreement, it is 15 days.
- With the Bank Rate at 5.75% since 7 October 2026, the statutory rate is 17.25% a year. Always verify the rate for your period.
- Medium enterprises and, generally, pure traders are not covered. Register on Udyam before you supply.
- Recovery runs through Section 17, Section 18, the MSEFC and MSME Samadhaan.
Conclusion
MSMED Act Section 16 is one of the strongest tools Indian law gives a small business against late payment. For eligible micro and small suppliers, it turns every day of delay into compounding interest at three times the RBI bank rate.
To use it well:
- Understand your rights under Sections 15 to 18.
- Register on Udyam before you supply.
- Put payment terms of 45 days or less in writing.
- Track your receivables and follow up early.
- Act on time, and seek professional legal or financial advice for large or disputed claims.
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Frequently Asked Questions
What is the interest rate under MSMED Act Section 16 today?
It is three times the RBI bank rate, compounded monthly. With the Bank Rate at 5.75% since 7 October 2026, that is 17.25% a year. Always confirm the latest Bank Rate before calculating a claim.
How many days does a buyer get to pay an MSME?
Payment must be made by the agreed date, which cannot exceed 45 days from acceptance. If nothing is agreed in writing, the limit is 15 days.
Is Section 16 interest automatic?
The liability arises by law, but it is not paid automatically. You need to raise the claim and, if necessary, file a reference before the MSEFC.
Can a contract reduce or waive the interest?
A contract term cannot override Section 16, because the provision applies notwithstanding any agreement. Section 24 also gives the Act overriding effect.
Does Section 16 apply to services as well as goods?
Yes. The Act covers goods supplied and services rendered by eligible micro and small enterprise suppliers.
Can I claim only interest if the buyer has already paid the principal?
Courts have allowed this. The Jharkhand High Court held that an interest-only claim is maintainable before the MSEFC.
How long does the MSEFC take to decide a case?
The Act requires every reference to be decided within 90 days. In practice, delays do occur, so prepare your documents well.
Do traders get protection under Section 16?
Wholesale and retail traders can register on Udyam for priority sector lending, but they are generally not treated as suppliers for delayed-payment protection. Verify your category with the official guidelines.
