In the Indian economy, Micro, Small and Medium Enterprises (MSMEs) are the main source of economic activity. They play a crucial role in the innovation, employment and sustainability of growth. Yet, one hindrance that MSMEs face continuously is the non-timely payments from the buyers, especially the government and large corporations. As an act of providing security to MSME suppliers, the government has laid down legal provisions which require buyers to pay interest on delayed payments to MSME suppliers, thus making small businesses financially secure and providing them with cash flows on time.
The article focuses on the process to be followed for calculating the interest on delayed payments to MSME suppliers, the legal framework, and the practical computation methodology.
Legal Framework Governing Delayed Payment Interest
The provisions related to delayed payments are established under the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006. The Act is designed to protect the rights of MSMEs and ensure that they receive payments from buyers within a statutory timeline. Here are the key sections related to interest on delayed payments include:
- Section 15 – Defines the period within which payments are due.
- Section 16 – Stipulates interest on delayed payments.
- Section 17 – Deals with recovery of amounts due.
These provisions are aimed at creating a fair payment ecosystem where MSME suppliers are not disadvantaged due to delayed receivables.
What Constitutes a Delayed Payment?
Before diving into the computation, it is important to understand when a payment is considered “delayed” under the law.
Due Date for Payment
Under Section 15:
- If there is a written agreement with a specified payment date, the buyer must make payment by that date, not exceeding 45 days from acceptance, even if a longer period is stated.
- If there is no written agreement, the payment must be made within 15 days of acceptance or deemed acceptance of goods/services.
Appointed Day
The appointed day is defined as the day immediately following the expiry of the statutory period (either 15 days or the agreed date not exceeding 45 days). From the appointed day onwards, interest liability begins if payment is not made.
Rate of Interest on Delayed Payments
The MSMED Act prescribes that Interest on delayed payments MSME must be paid at a rate equal to three times the bank rate notified by the Reserve Bank of India (RBI). This rate is applied compounded monthly.
Step-by-Step Guide to Interest Computation
Here’s how the interest on delayed payments is calculated in practice:
Step 1: Identify the Invoice Date and Amount
Determine the principal amount owed and the date the goods/services were delivered.
Step 2: Determine the Due Date
1) If there’s an agreement with a payment term ≤45 days, use that date.
2) If no agreement or agreement beyond 45 days, use 45 days from acceptance.
3) If no agreement at all, use 15 days from acceptance.
Step 3: Calculate the Appointed Day
The appointed day = Day after the due date expires.
Step 4: Determine Applicable RBI Bank Rate
Use the bank rate notified by the RBI on the appointed day and subsequent months until payment is received.
Step 5: Apply the Formula
Interest is compounded monthly. Although not explicitly given in the statute, practitioners apply standard compound interest formulae based on the monthly equivalent of the annual interest rate (3 × RBI bank rate) over the period of delay.
For example: If the annual interest rate is 18%, the monthly rate = 18% ÷ 12 = 1.5%. Apply this monthly to the outstanding amount until payment is made.
The resulting interest amount is the total legally claimable interest on delayed payment.
Illustrative Example Of Computing Interest On Delayed Payment
Suppose:
- Invoice Value: ₹500,000
- Acceptance Date: 1st March
- No written payment timeline
- Payment received on: 20th June
- RBI Bank Rate on due months: 6%
Computation:
| Month | Annual Rate (3×RBI) | Monthly Rate |
| March | 3 × 6% = 18% | 1.50% |
| April | 18% | 1.50% |
| May | 18% | 1.50% |
| June | 18% | 1.50% |
Total interest = compound interest at 1.5% per month on the delayed amount, from appointed day to actual payment.
Key Considerations for Computing Interest
Here are the key considerations for computing interest, useful for finance, accounting, and lending contexts:
- Monthly Rest Compounding: Interest under the MSMED Act must be applied with monthly rests, meaning interest is calculated on the interest accrued as well as on the principal.
- Variable Rates: Since the RBI bank rate can change over time, interest may vary month to month if payments stretch across periods where RBI revises rates. The buyer remains liable for whatever the current three-times-bank-rate is for each month in the delay period.
- Disputes and Recovery: If a buyer disputes payment or interest calculated, the supplier can escalate the matter to the Micro and Small Enterprises Facilitation Council (MSEFC) through the official MSME Samadhaan portal. The Council can direct payment of due amounts plus interest.
Documentation and Compliance for Buyers
For businesses dealing with MSME suppliers, adherence to compliance requirements is not only good practice, it is mandatory.
Companies Act Disclosures
Companies under audit must disclose:
- Principal MSME dues and interest payable.
- Interest actually paid during the year.
- Unpaid interest at year-end.
- Further interest remaining payable in future periods.
Income Tax Implications
Under Section 43B(h) of the Income Tax Act, payment obligations to MSMEs influence deduction timings. Delayed payments may not be deductible until actual payment is made.
Why Accurate Interest Computation Matters?
For MSME Suppliers
- Cash Flow Protection: Timely interest compensation supports operational liquidity.
- Legal Rights Enforcement: Proper calculation strengthens claims during dispute resolution.
- Business Continuity: Knowing the financial impact helps in pricing, contract terms and client selection.
For Buyers
- Avoid Penalties: Late payment interest can become significant when compounded monthly.
- Maintain Supplier Relations: Predictable payment discipline sustains business relationships.
- Compliance and Reporting: Avoid audit and statutory reporting issues.
Conclusion
Interest on delayed payments to MSME suppliers is a statutory right under the MSMED Act, intended to protect small businesses and ensure fair commercial conduct. The computation follows structured legal principles based on due dates, RBI bank rates and monthly compounding. Understanding how interest is calculated empowers both suppliers and buyers to manage financial responsibilities effectively and avoid costly disputes.
If you receive payments late, refer to the MSMED Act provisions, document your timelines clearly, compute interest accurately, and – if needed – raise a claim through the MSME Samadhaan system. For more support on MSME compliance, payment recovery, or related queries, Udyamita Helpline is here to guide you.
FAQs
Why Interest on Delayed Payment Is Three Times the Bank Rate?
The rationale behind a higher multiple of the RBI bank rate is to ensure that large buyers are incentivized to pay MSME suppliers on time and discourage undue delays.
