1. MSME 45 Days Payment Rule – What Does It Mean?
Under Section 15 of the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act), a buyer must make payment to a qualifying Micro or Small Enterprise (MSE) within the prescribed period.
- Where there is no written agreement, payment should be made within 15 days from the day of acceptance or deemed acceptance.
- Where there is a written agreement, payment must be made within the agreed period.
- The agreed payment period cannot exceed 45 days from the day of acceptance or deemed acceptance.
2. Which MSMEs Are Covered?
With effect from 1 April 2025, MSME classification is:
| Classification | Investment Limit | Annual Turnover Limit |
|---|---|---|
| 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 |
Both investment and turnover conditions are relevant for classification.
The delayed-payment and income-tax provisions discussed in this article apply to qualifying Micro and Small Enterprises. Medium Enterprises are not covered.
Businesses should therefore verify the supplier’s Udyam Registration, enterprise classification and nature of activity.
The above revised classification applies from 1 April 2025. For earlier periods, the classification applicable to the relevant period should be considered.
3. How Are 15 Days and 45 Days Calculated?
The payment period is linked to the day of acceptance or deemed acceptance of goods or services.
| Situation | Applicable Period |
|---|---|
| No written agreement | 15 days |
| Agreement for 30 days | 30 days |
| Agreement for 45 days | 45 days |
| Agreement for 60 days | Maximum 45 days |
Example
Suppose goods are accepted on 1 July and the agreed credit period is 30 days.
The buyer should pay within the agreed 30-day period. The buyer cannot automatically extend the payment period to 45 days.
Similarly, even if an agreement provides a 60-day credit period, the period recognised under Section 15 cannot exceed 45 days.
Where a written objection regarding acceptance of goods or services is raised within the prescribed period, the date of acceptance may be affected by the date on which the supplier removes the objection.
4. What Happens If Payment Is Delayed?
Delayed payment can create two separate consequences for the buyer.
Under Section 16 of the MSMED Act, failure to make payment within the applicable period can result in compound interest with monthly rests at three times the bank rate notified by the Reserve Bank of India.
Further, Section 23 of the MSMED Act provides that such interest payable or paid is not allowable as an income-tax deduction.
Where an amount payable to a qualifying Micro or Small Enterprise remains unpaid beyond the time permitted under Section 15, the related deduction is governed by the actual-payment rule under the applicable income-tax provision.
5. Section 43B(h) vs Section 37(2)(g)
The relevant provision depends on the applicable income-tax law:
| Period | Applicable Law | Relevant Provision |
|---|---|---|
| FY 2025-26 and earlier periods | Income-tax Act, 1961 | Section 43B(h) |
| Tax Year 2026-27 onwards | Income-tax Act, 2025 | Section 37(2)(g) |
Section 37 of the Income-tax Act, 2025 is part of the newly renumbered Act and should not be confused with Section 37 of the Income-tax Act, 1961 dealing with general business expenditure.
Does Payment Before the ITR Due Date Save the Deduction?
No, where the MSE payment has crossed the Section 15 time limit and remains unpaid at year-end.
The normal relief available for certain payments made after year-end but before the due date of filing the income-tax return is not available for such overdue MSE dues.
Accordingly, the affected amount is generally deductible in the tax year in which it is actually paid.
Important Year-End Point
The tax effect applies to the amount remaining unpaid at the end of the tax year.
If an invoice crosses the MSMED Act payment deadline but is actually paid within the same tax year, the deduction does not shift merely because the payment was late.
For a part-payment, only the amount remaining unpaid at year-end needs to be examined for this purpose.
6. Practical Year-End Example
Suppose a business purchases services worth ₹5,00,000 from a qualifying Small Enterprise and the amount remains outstanding at year-end.
The business should check:
Check the supplier’s Udyam Registration, MSE classification and nature of activity.
Identify the acceptance date, agreed credit period and the applicable Section 15 due date.
Compare the amount remaining unpaid at year-end with the applicable payment deadline.
Determine when the outstanding amount was actually paid for income-tax deduction purposes.
If the permitted payment period has expired and the entire ₹5,00,000 remains unpaid at year-end, the deduction may be deferred until the tax year in which payment is actually made.
If ₹3,00,000 has already been paid and only ₹2,00,000 remains outstanding, the unpaid portion should be examined separately.
7. What About Wholesale and Retail Traders?
Retail and wholesale traders under specified NIC Codes are permitted to obtain Udyam Registration.
However, the Ministry of MSME has clarified that the benefits available to such retail and wholesale trade MSMEs are restricted to Priority Sector Lending.
Therefore, the existence of an Udyam Registration alone should not automatically be treated as sufficient for applying the MSMED Act delayed-payment benefit or the related income-tax provision to a trading supplier.
These factors should be verified before determining the applicable treatment.
8. Udyam Registration – Practical Verification
Businesses should obtain and verify the supplier’s Udyam Registration details while determining whether the supplier qualifies as a Micro or Small Enterprise.
The timing of registration may also become relevant.
In NBCC (India) Ltd. v. State of West Bengal (2025 INSC 54), the Supreme Court considered whether registration is a necessary precondition for invoking the statutory dispute-resolution mechanism under Section 18 of the MSMED Act and referred the issue to a larger Bench.
This concerns the Section 18/MSEFC dispute-resolution framework and should not automatically be treated as determining the separate income-tax applicability of Section 43B(h) / Section 37(2)(g).
Accordingly, where Udyam registration was obtained after the relevant contract, transaction or supply, the facts and applicable legal position should be examined carefully rather than applying a blanket rule.
9. MSME Form-1 – Additional Compliance for Companies
Specified companies may also have a reporting obligation through MSME Form-1.
Where payments to Micro or Small Enterprise suppliers remain pending for more than 45 days from the date of acceptance or deemed acceptance, the applicable reporting requirement should be reviewed.
| Reporting Period | Due Date |
|---|---|
| April to September | 31 October |
| October to March | 30 April |
MSME Form-1 reporting is a separate compliance requirement and should not be confused with the income-tax treatment of outstanding MSE dues.
10. Practical Compliance Checklist
- Verify the supplier’s Udyam Registration.
- Identify whether the supplier is Micro, Small or Medium.
- Check the supplier’s nature of activity.
- Maintain invoice and goods/service acceptance dates.
- Preserve purchase orders and agreed credit terms.
- Track Micro and Small Enterprise creditors separately.
- Review invoices crossing the applicable 15-day or agreed period up to 45 days.
- Perform year-end MSE creditor ageing.
- Reconcile overdue balances with the income-tax computation.
- Maintain evidence of actual payments.
- Review MSME Form-1 applicability for companies.
Eligible Micro and Small Enterprises may also approach the Micro and Small Enterprises Facilitation Council (MSEFC) for delayed-payment disputes, subject to the applicable provisions.
11. Frequently Asked Questions
Is every MSME required to be paid within 45 days?
No. The provisions discussed here apply to qualifying Micro and Small Enterprises. Further, 45 days is the maximum ceiling where a written agreement exists; it is not an automatic credit period.
What if there is no written agreement?
Payment should generally be made within 15 days from the day of acceptance or deemed acceptance.
If the agreement provides 30 days, can the buyer pay within 45 days?
No. The agreed 30-day period remains relevant. The 45-day limit is only the maximum statutory ceiling.
What happened to Section 43B(h)?
Section 43B(h) continues to apply for FY 2025-26 and earlier periods under the Income-tax Act, 1961. From Tax Year 2026-27 onwards, the corresponding provision under the Income-tax Act, 2025 is Section 37(2)(g).
Can payment before the ITR due date save the deduction?
No, where the applicable Section 15 payment period has been breached and the amount remains unpaid at year-end. The normal return-filing due-date relief is not available for such MSE dues.
Is delayed-payment interest deductible?
No. Section 23 of the MSMED Act provides that interest payable or paid under the delayed-payment provisions is not allowable as an income-tax deduction.
12. Conclusion
The MSME payment rule should not simply be understood as “every MSME must be paid within 45 days.”
The correct analysis is:
A delay can result in statutory interest and may also defer the related income-tax deduction.
For businesses dealing with multiple MSE suppliers, maintaining a separate MSE creditor ageing and payment tracker is one of the simplest ways to reduce year-end tax and compliance issues.
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