MSME · Provision
Compound interest with monthly rests at 3× the RBI bank rate on any payment late to a registered micro or small enterprise. No contract can waive it. (Section 16, Micro, Small and Medium Enterprises Development Act, 2006.) In force since 2 October 2006 · Text checked against India Code on 8 October 2026.
Quick Statutory Answer
Under Section 16 of the MSMED Act 2006, delayed payment to a registered micro or small enterprise attracts mandatory compound interest with monthly rests at 3× the RBI bank rate from the appointed day. At the current RBI bank rate of 5.50% (as of 2026), the penalty interest rate is 16.50% per annum compounded monthly. No contract clause can waive or reduce this statutory liability.
Enter your own figures in the calculator on this page: MSME interest calculator, under Micro, Small and Medium Enterprises Development Act, 2006, s.16.
16. Date from which and rate at which interest is payable.— 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.
| Delay Period | RBI Bank Rate | Statutory Multiplier | Effective Compound Interest | Simple Interest Comparison | Section 43B(h) Tax Impact |
|---|---|---|---|---|---|
| 30 Days (1 Month) | 5.50% | 3× (16.50%) | ₹1,375 | ₹1,356 | Tax deductible if paid within FY |
| 60 Days (2 Months) | 5.50% | 3× (16.50%) | ₹2,769 | ₹2,712 | Tax deductible if paid within FY |
| 90 Days (3 Months) | 5.50% | 3× (16.50%) | ₹4,182 | ₹4,068 | Tax deductible if paid within FY |
| 180 Days (6 Months) | 5.50% | 3× (16.50%) | ₹8,534 | ₹8,137 | Disallowed if unpaid on 31 March |
| 365 Days (1 Year) | 5.50% | 3× (16.50%) | ₹17,807 | ₹16,500 | 100% Disallowed + added back to taxable income |
3× the RBI bank rate, compounded monthly. At a bank rate of 5.5%, the section 16 rate is 16.5% p.a. compounded monthly, from the appointed day, and not capable of being contracted out of.
Section 16 of the Micro, Small and Medium Enterprises Development Act 2006 (MSME Act / MSMED Act 2006) requires a buyer who fails to pay a registered micro or small enterprise by the appointed day to pay compound interest with monthly rests at three times the bank rate notified by the Reserve Bank of India. This liability arises automatically from the statute and cannot be waived or reduced by any agreement between the parties.
Section 15 and section 16 of the MSME Act 2006 (MSMED Act) work together: section 15 fixes the maximum credit period at forty-five days from acceptance and defines the appointed day, while section 16 imposes compound interest at three times the RBI bank rate from that appointed day if the buyer is late. Together they set both when payment is due and what being late costs.
Three times the bank rate notified by the Reserve Bank of India, compounded with monthly rests. At the current bank rate of 5.5%, the section 16 MSME interest rate is 16.5% per annum compounded monthly, running from the appointed day fixed by section 15. Because the bank rate moves, always verify it against the RBI's current rates page before computing.
Section 16 of the MSME Act (MSMED Act) applies if: (1) you are a registered micro or small enterprise (Udyam certificate), and (2) the buyer has not paid by the appointed day — either the agreed date or forty-five days from acceptance, whichever is earlier. If both conditions are met, compound interest at 3× the RBI bank rate accrues from the day after the appointed day.
Section 15 sets the payment period — the agreed date or fifteen days from acceptance, capped at forty-five days. Section 16 imposes compound interest at three times the RBI bank rate when that period is missed. Section 15 defines when payment is due; section 16 prices what being late costs.
No. Section 16 operates notwithstanding anything contained in any agreement between the buyer and the supplier. A clause in the purchase order or vendor agreement that reduces the rate or waives interest altogether has no legal effect against the statutory liability.
No. Sections 15 and 16 of the MSMED Act 2006 protect micro and small enterprises as suppliers. A medium enterprise cannot claim delayed-payment interest under section 16, even if registered under the Act.
Compound interest with monthly rests at three times the RBI bank rate. Formula: principal × (1 + monthly rate)^completed months × (1 + monthly rate × odd days/30), where monthly rate = (3 × bank rate%) / 1200. Simple interest understates the figure for any overdue amount beyond a few months.
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