The MSME 45-Day Payment Rule: How Small Businesses Can Use It to Get Paid on Time
Late payment is the single biggest cash-flow problem for small businesses in India. A large customer pays in 90 or 120 days, and the small supplier has to fund salaries, rent and raw material in the meantime.
The law gives micro and small enterprises real protection against this. The MSMED Act sets a 45-day maximum payment period and penal interest for delays, and the Income-tax law adds a strong incentive for buyers to comply. This guide explains how the rule works and what you should put on your invoices to benefit from it.
Who is protected?
The protection applies to suppliers who are micro or small enterprises and are registered on the Udyam portal. Since 2020, the classification is:
| Category | Investment in plant, machinery or equipment | Annual turnover |
|---|---|---|
| Micro | Up to 2.5 crore | Up to 10 crore |
| Small | Up to 25 crore | Up to 100 crore |
| Medium | Up to 125 crore | Up to 500 crore |
These limits were revised upward from 1 April 2025; earlier limits were lower. A business has to meet both the investment and the turnover test for its category.
Medium enterprises are not covered by the payment protection. Traders can register on Udyam for priority-sector lending, but the delayed-payment protection is generally understood not to extend to them. If you are a trader, check your position with your adviser.
The rule in Section 15 of the MSMED Act
When a buyer purchases goods or services from a micro or small enterprise, the buyer must pay:
- On or before the date agreed in writing, but the agreed period can never exceed 45 days from the day of acceptance (or deemed acceptance) of the goods or services.
- If there is no written agreement on the payment date, within 15 days of acceptance.
"Day of acceptance" is the day the goods are delivered or the services rendered. If the buyer raises an objection in writing within 15 days, the clock starts from the day the defect is removed.
A contract that says "payment in 90 days" does not override this. For a micro or small supplier, the law caps the period at 45 days.
Penal interest under Section 16
If the buyer pays late, they owe compound interest with monthly rests at three times the bank rate notified by the Reserve Bank of India, from the date the payment was due. That is a steep rate, and it is payable by law, regardless of what the contract says.
The buyer also cannot deduct this interest as a business expense for income tax.
The income-tax incentive
From the 2023-24 financial year, Section 43B(h) of the Income-tax Act, 1961 added a powerful nudge: a buyer can claim a deduction for an amount payable to a micro or small enterprise only in the year it is actually paid, if it is paid beyond the time limit in Section 15. In other words, if a buyer owes you money past the 45-day limit at year-end, they lose the deduction for that year and pay more tax.
This is why many larger companies started asking suppliers for their Udyam certificates and paying MSME invoices first. The new Income-tax Act, 2025, which replaces the 1961 Act, carries a similar provision. Confirm the current section reference with your CA.
Reporting by buyers
Companies that buy from micro and small enterprises and pay late are required to report outstanding dues to the Registrar of Companies in the half-yearly MSME Form I. Their auditors also report MSME dues in the financial statements. That visibility gives suppliers additional leverage.
What to put on your invoices
To make the rule work for you, make your status obvious on every invoice:
- Your Udyam Registration Number, for example UDYAM-MH-01-0012345.
- Your category: "Micro Enterprise" or "Small Enterprise".
- Clear payment terms, for example "Payable within 30 days of acceptance" (anything up to 45 days).
- A short legal note, such as: "As per Section 15 of the MSMED Act, 2006, payment is due within 45 days of acceptance. Delayed payment attracts interest under Section 16."
- Delivery or completion date, so the day of acceptance is easy to establish.
Our guide to GST invoice fields covers the rest of what a valid invoice needs.
What if a buyer still doesn't pay?
- Send a polite reminder referring to the due date and your Udyam status.
- Send a formal notice mentioning Sections 15 and 16 of the MSMED Act and the interest that is accruing.
- File a case on the MSME Samadhaan portal. The case goes to the Micro and Small Enterprises Facilitation Council (MSEFC) of your state, which first tries conciliation and then arbitration. An award is enforceable, and if the buyer wants to challenge it in court, they generally have to deposit 75% of the award amount first.
Keep your invoices, delivery proof, and correspondence in order. The council will look at them.
Practical tips
- Update your Udyam registration each year; it is linked to your PAN and GST data.
- Send invoices promptly. The 45-day clock is about acceptance, but a buyer cannot pay an invoice they have not received.
- Avoid accepting longer terms in writing. They are not enforceable beyond 45 days, but they create arguments.
- Track ageing so you know which invoices are approaching 45 days.
Add your Udyam number to every invoice
In the OwnInvoice Invoice Studio, use a custom field for your Udyam number and the payment-terms box for the 45-day note. The details stay saved in your browser for the next invoice. If you need to write the total in words, the amount in words tool does it in rupees and paise.
Note: This article is general information. MSME classification limits and tax provisions change; check your eligibility and the current law with a chartered accountant before acting on a dispute.