Section 16, MSMED Act 2006 — Interest on Delayed Payment to an MSME

What the section does

• Where a buyer fails to pay a registered micro or small enterprise by the appointed day, the buyer is liable to pay compound interest with monthly rests on the amount.
• The rate is three times the bank rate notified by the Reserve Bank of India. That is the bank rate specifically, not the repo rate and not any rate agreed in the contract.
• Interest runs from the appointed day, which section 15 fixes as the agreed date or, failing agreement, fifteen days from acceptance — and in no case later than forty-five days from acceptance.
• The section applies notwithstanding anything contained in any agreement between the parties, so a clause reducing or waiving the interest simply does not operate against it.

Statutory interest

3× the RBI bank rate. Compounded with monthly rests, from the appointed day, and not capable of being contracted out of.

Where people go wrong

• Computing simple interest. The section says compound with monthly rests, and simple interest materially understates a long-overdue amount.
• Using the repo rate. The section refers to the bank rate notified by the RBI, which is a different published figure.
• Assuming a 90-day payment clause is effective. Section 15 caps the agreed period at forty-five days regardless of what was signed.
• Assuming the supplier has to claim it. The liability arises from the statute, and the related disallowance for the buyer under the income-tax law follows from non-payment rather than from any demand.

Common questions

What is the interest rate under section 16 of the MSMED Act?

Three times the bank rate notified by the Reserve Bank of India, compounded with monthly rests, running from the appointed day fixed by section 15. Because the bank rate moves, the applicable figure has to be taken from the RBI rather than assumed.

Can a contract waive MSMED section 16 interest?

No. Section 16 operates notwithstanding anything contained in any agreement between the buyer and the supplier, so a clause fixing a lower rate or waiving interest altogether has no effect against the statutory liability.

From what date does MSME interest run?

From the appointed day, defined by section 15 as the day immediately following the agreed date of payment, or where there is no written agreement, the day after fifteen days from acceptance. The period can never exceed forty-five days from the day of acceptance.

Act on this

• MSME interest calculator
• What late payment to an MSME actually costs
• MSME statutory notice template

• MSME interest calculator
• What late payment to an MSME actually costs
• MSME statutory notice template

About this summary

A plain-English summary of what this provision requires, not a reproduction of it and not legal advice. Read alongside the bare Act, and take advice on anything turning on your own facts.