Payment terms in contracts and the MSME 45-day rule

Quick answer: If you buy from a registered micro or small enterprise, the MSMED Act, 2006 requires payment within the agreed period, which cannot exceed 45 days from acceptance of the goods or services (or 15 days if nothing is agreed). Late payment attracts compound interest at three times the RBI bank rate. Income tax rules from 2024 also restrict deductions for such payments made late. Good payment clauses state the amount, invoice timing, due date, method, and the consequence of delay.

Cash flow decides whether a small business survives. Payment terms are where it's protected.

What should a payment clause say?

• Amount and currency, and whether it includes GST.
• When invoices are raised: on delivery, on milestones, monthly.
• Due date: e.g. "within 30 days of receipt of a valid invoice".
• How to pay: bank transfer details, and how changes to bank details are confirmed.
• Late payment: interest, and the right to suspend work after notice.
• Disputed invoices: pay the undisputed part on time and raise disputes within a set period.

The MSME rule (Sections 15 and 16)

Where the supplier is a micro or small enterprise registered under the MSMED Act (Udyam registration):

• The buyer must pay on or before the agreed date, and the agreed period cannot exceed 45 days from the day of acceptance or deemed acceptance.
• With no agreement, payment is due within 15 days.
• Late payment carries compound interest with monthly rests at three times the bank rate notified by the RBI.

Recovery

A micro or small supplier can refer a dispute to the Micro and Small Enterprises Facilitation Council (MSEFC), which tries conciliation and then arbitration. The MSME Samadhaan portal is used to file delayed payment applications.

The tax angle

From the 2024-25 tax year, Section 43B(h) of the Income-tax Act, 1961 allowed a buyer to deduct amounts owed to micro and small enterprises only when paid, if payment was later than the MSMED Act limit. The Income-tax Act, 2025 replaces the 1961 Act from 1 April 2026; check the current equivalent with your tax adviser.

Frequently asked questions

Does the 45-day rule apply to all suppliers?

No. It applies to payments to micro and small enterprises registered under the MSMED Act, not to medium enterprises or unregistered suppliers.

What interest is payable on late MSME payments?

Compound interest with monthly rests at three times the bank rate notified by the Reserve Bank of India, under Section 16 of the MSMED Act.

Can a contract give 60 or 90 days to pay an MSE supplier?

The MSMED Act caps the agreed period at 45 days from acceptance, so a longer term doesn't avoid the Act's consequences.

Check payment terms quickly

April's [review](/features/review) highlights payment terms, late-payment interest and suspension rights in any contract you upload.

This article is general information, not legal or tax advice.