MSME 45-Day Payment Rule: Income Tax Disallowance
In short
If a business pays a micro or small enterprise later than the time limit in section 15 of the MSMED Act, 2006 (the agreed date, which can never be more than 45 days from acceptance, or 15 days where there is no written agreement), the purchase or expense is deductible only in the tax year in which it is actually paid. From 1 April 2026 this rule sits in section 37(2)(g) of the Income-tax Act, 2025, which replaces section 43B(h) of the 1961 Act. Unlike taxes or PF dues, there is no extra time up to the return due date, and the buyer also owes the supplier compound interest at three times the RBI bank rate.
Since 2023, paying a micro or small supplier late has cost the buyer more than goodwill. The Income-tax Act pushes the deduction for an unpaid MSME bill into the year it is finally paid, which can turn a book expense into taxable profit at year-end. The rule moved into a new section when the Income-tax Act, 2025 took effect on 1 April 2026, and the MSMED Act itself was amended in August 2026.
This guide explains the rule as it stands for tax year 2026-27. It uses the text of section 37 of the Income-tax Act, 2025_Bill.pdf) (the Act as passed by Parliament), the Reserve Bank's summary of the payment rules in its MSME lending FAQ, and the MSMED (Amendment) Act, 2026 published by the Ministry of MSME.
What is the MSME 45-day payment rule?
It is a deadline in section 15 of the Micro, Small and Medium Enterprises Development Act, 2006. A buyer must pay a micro or small supplier on or before the date agreed in writing, and the agreed period can never exceed 45 days from the day the goods or services are accepted or deemed accepted. Where there is no written agreement, payment is due before the "appointed day", which is the day after 15 days from acceptance or deemed acceptance.
The Reserve Bank sets out the same rule for banks in its MSME FAQ: payment on the agreed date or before the appointed day, an agreed period of no more than 45 days, and compound interest if the buyer pays late. The ICAI's Chartered Accountant journal reproduces section 15 and the definition of the appointed day.
| Situation | Payment due by |
|---|---|
| Written agreement of 45 days or less | The agreed date |
| Written agreement of more than 45 days | 45 days from acceptance or deemed acceptance (the cap overrides the contract) |
| No written agreement | Before the appointed day, that is within 15 days of acceptance or deemed acceptance |
When are goods or services "accepted"?
Acceptance is the day of actual delivery of the goods or rendering of the services. If the buyer raises a written objection within 15 days of delivery, acceptance is the day the supplier removes the objection. If no written objection is raised within 15 days, the day of delivery is the day of deemed acceptance. In practice this means the clock usually starts on the date of delivery, not the invoice date or the date the bill reaches accounts.
Which section of the Income-tax Act, 2025 disallows late MSME payments?
Section 37(2)(g). Section 37 replaces section 43B of the Income-tax Act, 1961 and allows certain sums only in the tax year in which they are actually paid, "irrespective of" the method of accounting or the year in which the liability was incurred. Clause (g) covers any "amount payable by the assessee to a micro or small enterprise beyond the time limit specified in section 15" of the MSMED Act. It carries forward section 43B(h), which the Finance Act, 2023 introduced.
| Point | Income-tax Act, 1961 | Income-tax Act, 2025 |
|---|---|---|
| Section | 43B(h) | 37(2)(g) |
| Applies to | Previous years up to 2025-26 | Tax year 2026-27 onwards |
| Deduction allowed | In the year of actual payment | In the tax year of actual payment |
| Relief for payment before the return due date | Not available for clause (h) | Not available for clause (g) (section 37(3)) |
| Meaning of micro and small enterprise | As classified under the MSMED Act | As classified by notification under the MSMED Act (section 66(11) and (30)) |
The old-to-new section map covers the other renumbered business provisions.
How does the disallowance work in practice?
The expense moves to the year of payment. If a bill for a micro or small supplier is still unpaid on 31 March and the 15-day or 45-day limit has already passed, the amount is added back in computing business income for that year. It is then allowed in the year the bill is paid. Section 37(5) stops it being claimed twice.
Two examples for tax year 2026-27, which ends on 31 March 2027:
| Case | Facts | Result |
|---|---|---|
| Agreed 60 days | Goods delivered and accepted on 1 February 2027, contract says 60 days. The 45-day cap makes the due date 18 March 2027. Paid on 10 April 2027. | Paid after the limit, so the deduction moves to tax year 2027-28. |
| No agreement | Services rendered on 20 March 2027, no written agreement. Payment due within 15 days, by 4 April 2027. Paid on 2 April 2027. | Paid within the limit, so clause (g) does not apply and the expense stays in tax year 2026-27. |
The second case shows a point that is often missed. Clause (g) bites only on amounts paid beyond the time limit. A bill that is unpaid on 31 March but still within its 15 or 45 days is not caught, provided it is then paid on time.
Why does paying before the return due date not help?
Because section 37(3) excludes clause (g). For taxes, employer PF contributions, leave encashment, interest to banks and the other items in section 37(2), a payment made after year-end but before the return due date under section 263(1) is allowed in the earlier year. The same subsection says this relief applies "except the sum referred to in clause (g)". For a late MSME bill, only the actual payment date matters.
Who counts as a micro or small enterprise?
An enterprise classified as micro or small by the Central Government's notification under the MSMED Act. Section 66(11) and (30) of the Income-tax Act, 2025 adopt that classification directly. The limits in force since 1 April 2025, confirmed in the Ministry of MSME's year-end review 2025, are:
| Category | Investment in plant and machinery or equipment | 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 |
Medium enterprises, and larger suppliers, are not covered by section 37(2)(g). The classification comes from the supplier's Udyam registration, so the practical first step is to collect a Udyam certificate from every supplier and record its category in the vendor master. Suppliers who are not yet registered can do so free on the government portal; our MSME Udyam registration service can help.
Does the rule apply to purchases from traders?
The common view is that it does not. The Ministry of MSME allowed retail and wholesale traders to register on Udyam by an office memorandum of 2 July 2021, and a further memorandum of 1 September 2021 limited the benefit for those traders to priority sector lending, excluding the delayed payment protections. The ICAI journal article linked above sets out both memoranda and concludes that purchases from traders can be treated as outside section 43B(h). This is an interpretation rather than a statutory exclusion, so check how the supplier is registered.
What interest does a buyer owe for paying an MSME late?
Compound interest with monthly rests at three times the bank rate notified by the Reserve Bank, under section 16 of the MSMED Act. It runs from the appointed day or the agreed date. The bank rate on the Reserve Bank's website was 5.75% on 11 November 2026, which makes the MSME rate 17.25% a year, compounded monthly. Section 23 of the MSMED Act says this interest is not deductible for income tax, so it is a pure cost to the buyer.
What did the MSMED (Amendment) Act, 2026 change?
It did not change the 45-day limit in section 15 or the interest in section 16, so the income tax rule works exactly as before. It received assent on 13 August 2026, and its provisions come into force on dates the Central Government notifies. The Ministry's press release lists the main changes. Because commencement is by notification, check that a provision is in force before relying on it.
| Change | Section of the amended MSMED Act |
|---|---|
| Classification by both investment and turnover written into the Act | 7(1) |
| Udyam made a free and voluntary national digital platform; states may run their own | 8 |
| Central public sector enterprises must settle MSME invoices through a TReDS platform | 15A |
| Mediation within 90 days, reference to arbitration within 30 days, award within 90 days of pleadings | 18 |
| Awards and settlements recoverable as arrears of land revenue | 18A |
| 75% deposit to challenge an award; at least 50% released to the supplier if the challenge is pending over six months | 19 |
| Graded civil penalties instead of fines, including for buyers who breach section 22 | 27 and 27A |
What do companies have to report about MSME dues?
Two things. First, section 22 of the MSMED Act requires a buyer whose accounts are audited to disclose in its annual accounts the principal and interest unpaid to micro and small suppliers at year-end, interest paid during the year and interest accrued. Under the amended section 27, once in force, a buyer that breaches section 22 is warned the first time and then faces a penalty of ₹10,000 to ₹50,000 for a second breach and ₹50,000 to ₹1 lakh for later ones.
Second, a company whose payments to micro and small suppliers exceed 45 days from acceptance must file a half-yearly return with the Ministry of Corporate Affairs stating the amount due and the reason for the delay. This is Form MSME-1, required by the Government's notification S.O. 5622(E) of 2 November 2018, as the Ministry of Finance explained to Parliament. A supplier-wise ageing of MSME payables gives the figures for both, and for the income tax add-back.
How should a business stay compliant?
Build the 15 and 45 days into the payables process rather than finding them at year-end:
- Collect Udyam certificates and tag each supplier as micro, small, medium, trader or non-MSME.
- Put written payment terms of 45 days or less in purchase orders for micro and small suppliers.
- Record the delivery or acceptance date, not just the invoice date, and log any written objection raised within 15 days.
- Run a monthly ageing of MSME payables against each due date and pay the oldest first.
- At 31 March, list the MSME bills already past their limit; they are added back for the year.
- Use the same list for the section 22 note, Form MSME-1 and the tax audit report.
Our accounting and bookkeeping service maintains this vendor tagging and ageing as part of the monthly close. For the books you need to keep in the first place, see books of account for a private limited company, and for the tax you deduct on the same supplier payments, TDS on rent, professional fees and contractors.
Frequently asked questions
Is section 43B(h) still applicable after 1 April 2026?
For tax year 2026-27 onwards the rule is in section 37(2)(g) of the Income-tax Act, 2025, which has the same wording in substance. Section 43B(h) of the 1961 Act still governs returns, assessments and appeals for the years up to 2025-26, because section 536(2)(c) keeps the repealed Act in force for earlier years.
Does section 37(2)(g) apply to medium enterprises?
No. The clause covers only amounts payable to a micro or small enterprise. A supplier classified as medium, with investment up to ₹125 crore and turnover up to ₹500 crore, is outside it, although the supplier may still have contractual remedies for late payment. Check the category on the supplier's Udyam certificate each year, because the classification can change.
Is the 45 days counted from the invoice date?
No. It runs from the day of acceptance or deemed acceptance of the goods or services, which is normally the day of delivery. If the buyer objects in writing within 15 days of delivery, it runs from the day the supplier removes the objection. An invoice raised before or after delivery does not move the start date.
What if our contract with an MSME supplier says 90 days?
The contract cannot extend the limit. Section 15 of the MSMED Act caps any agreed period at 45 days from acceptance, so the payment is late for tax purposes once the 45th day passes. If the bill is still unpaid at 31 March after that day, the amount is disallowed for that year and allowed in the year it is paid.
What is the time limit if there is no written agreement with the supplier?
Payment is due before the appointed day, which is the day after 15 days from acceptance or deemed acceptance. In effect the buyer has 15 days. An email or purchase order that sets out the payment terms is the simplest way to get the full 45 days, so agree terms in writing before the goods arrive.
Is the disallowed amount allowed later?
Yes. Section 37(1) allows the sum in the tax year in which it is actually paid, so a bill disallowed in tax year 2026-27 and paid in May 2027 is deductible in tax year 2027-28. Section 37(5) makes sure a sum already allowed in one year is not claimed again in the year of payment.
Does section 37(2)(g) apply to capital goods bought from an MSME?
Section 37 applies only to sums otherwise allowable as a deduction. The price of a machine is not deducted as an expense; it is capitalised and depreciated, so the clause is generally read as applying to revenue items such as raw materials, stock, job work and services. This is an interpretation rather than an express exclusion, so take advice on large capital purchases.
Does the MSME payment rule apply under presumptive taxation?
Not in practice. Where income is declared on a presumptive basis under section 58 of the Income-tax Act, 2025, section 58(4) says no loss, allowance or deduction is allowed against that income, so there is no separate expense to disallow. The rule matters for businesses that compute profit from their books.
Does the supplier need to be registered on Udyam?
The tax clause refers to an enterprise classified as micro or small under the MSMED Act, and Udyam is how that classification is recorded and proved. Without a certificate the buyer cannot easily show a supplier's status either way. After the 2026 amendment, filing on Udyam is free and voluntary, so ask every supplier to confirm its status in writing.
Is the interest paid to an MSME supplier deductible?
No. Section 23 of the MSMED Act says interest payable or paid by a buyer under the Act is not allowable as a deduction in computing income. The interest, at three times the RBI bank rate with monthly rests, is therefore a cost after tax. Paying within the limit avoids both the interest and the disallowance.
What is the current rate of interest on delayed MSME payments?
Three times the bank rate notified by the Reserve Bank, compounded monthly. The bank rate shown on the RBI website on 11 November 2026 was 5.75%, so the rate is 17.25% a year with monthly rests. The rate changes whenever the RBI changes the bank rate, so check it for the period of delay.
Where can an MSME supplier complain about delayed payment?
To the Micro and Small Enterprises Facilitation Council of its state, which first tries mediation and then arbitration. Cases can be filed online through the Ministry of MSME's Samadhaan portal, and an online dispute resolution portal was launched on 27 June 2025. Once the 2026 amendment to section 18 is in force, mediation must finish within 90 days and the award follow within 90 days of pleadings.
Can a buyer challenge an MSE Facilitation Council award?
Yes, but once the amended section 19 of the MSMED Act is in force, a buyer must first deposit 75% of the awarded amount with the court. If the challenge is pending for more than six months, the court must release at least 50% of the award to the supplier. Awards can also be recovered as arrears of land revenue under the new section 18A.
Must central public sector enterprises pay MSMEs through TReDS?
Yes, once the provision is in force. Section 15A, inserted by the MSMED (Amendment) Act, 2026, requires every central public sector enterprise to route settlement of invoices for goods and services bought from MSMEs through a Trade Receivables Discounting System platform authorised by the RBI. The Central and State Governments can extend this to other buyers by notification.
What are the penalties for not disclosing MSME dues in the accounts?
Under section 27(2) of the MSMED Act, as substituted in 2026 and from the date it is in force, a buyer that breaches the section 22 disclosure rule is warned the first time, faces a penalty of ₹10,000 to ₹50,000 for a second breach, and a fine of ₹50,000 to ₹1 lakh for a third or later breach. The Development Commissioner adjudicates, with an appeal to the Secretary of the Ministry.
Does a sole proprietor or partnership firm also face this disallowance?
Yes, if it computes business income from its books. Section 37 applies to any assessee whose expenses are deductible under the head profits and gains of business or profession, whether a company, LLP, firm or individual. The MSME-1 return and the section 22 note are separate obligations that apply to companies and to buyers whose accounts must be audited.
