The 45-Day MSME Payment Rule: How the Tax Deduction Works Under the Income-tax Act 2025

If you buy goods or services from a micro or small enterprise, the MSMED Act 2006 requires you to pay within the date agreed in writing (never more than 45 days from acceptance) or, if there is no written agreement, within 15 days of acceptance. If you pay later, section 37(2)(g) of the Income-tax Act 2025 (which replaced section 43B(h) of the 1961 Act) allows the expense as a deduction only in the tax year you actually pay it, with no grace period up to the return date. The supplier is also owed compound interest at three times the RBI bank rate.

Sources checked: 20 October 2026

Facts checked on 20 October 2026 against section 37 of the Income-tax Act 2025 and section 43B of the Income-tax Act 1961 on incometaxindia.gov.in, the department's 1961-to-2025 comparison utility, and the MSMED Act 2006 text and FAQs on samadhaan.msme.gov.in.

Key facts

Point	Rule	Source
Payment deadline, written agreement	Agreed date, but never more than 45 days from acceptance or deemed acceptance	MSMED Act s.15
Payment deadline, no agreement	Before the "appointed day": the day after 15 days from acceptance or deemed acceptance	MSMED Act s.2(b), s.15
Interest on late payment	Compound interest with monthly rests at three times the RBI bank rate	MSMED Act s.16
Tax rule (tax year 2026-27 onwards)	Amount payable to a micro or small enterprise beyond the s.15 limit is deductible only when paid	Income-tax Act 2025 s.37(2)(g)
Grace period up to return date	Not available for this clause	s.37(3)
Earlier law (to FY 2025-26)	Section 43B(h), inserted by Finance Act 2023 with effect from 1 April 2024	Income-tax Act 1961
Who is protected	Micro and small enterprises (not medium)	s.37(2)(g); MSMED Act s.2(h) and (m)
Where suppliers complain	State Micro and Small Enterprises Facilitation Council; new applications on the MSME ODR portal	MSMED Act s.18; Samadhaan

What does the MSMED Act require?

Section 15 of the MSMED Act requires the buyer to pay on or before the date agreed in writing with the supplier, or, where there is no such agreement, before the appointed day. The proviso adds that the agreed period can never exceed 45 days from the day of acceptance or deemed acceptance.

Section 2(b) defines the "appointed day" as the day immediately after the expiry of 15 days from acceptance or deemed acceptance. Acceptance has a precise meaning:

• Day of acceptance: the day goods are actually delivered or services rendered. If the buyer objects in writing within 15 days of delivery, it is the day the supplier removes the objection.
• Day of deemed acceptance: where there is no written objection within 15 days, the day of actual delivery or rendering of services.

If the buyer pays late, section 16 makes it liable for compound interest with monthly rests at three times the bank rate notified by the Reserve Bank, from the appointed day or the day after the agreed date. Section 16 applies notwithstanding any agreement to the contrary. The bank rate changes from time to time, so check the current rate on the RBI website rather than relying on a figure in a contract.

What did the Income-tax Act 2025 change?

The rule moved, but its effect did not. Under the 1961 Act, clause (h) of section 43B covered "any sum payable by the assessee to a micro or small enterprise beyond the time limit specified in section 15" of the MSMED Act. The department's comparison utility maps section 43B to section 37 of the 2025 Act, and clause 37(2)(g) carries the same words.

Section 37(1) allows these sums as a deduction only in the tax year in which they are actually paid, whatever your method of accounting and whichever year the liability arose in. Section 37(3) gives most items in section 37(2), such as taxes and employer contributions, a grace period: paid by the return due date, they are allowed in the year of the liability. That relief expressly excludes clause (g). The 1961 Act had the same exclusion for clause (h).

Under section 43B, "micro enterprise" and "small enterprise" took their meaning from section 2(h) and 2(m) of the MSMED Act; the comparison utility maps that part of section 43B to section 66 (interpretation) of the 2025 Act. Payments to medium enterprises are outside the clause.

Who does the rule apply to?

It applies to any buyer who claims the purchase or expense as a business deduction and who owes money to a micro or small supplier. The MSMED Act defines a "supplier" as a micro or small enterprise that has filed its memorandum with the notified authority; today that is Udyam registration. The MSME Samadhaan FAQ says Udyam registration is mandatory for the delayed-payment benefits and must be dated before the invoice in dispute.

Practical points for buyers:

• Ask suppliers for their Udyam certificate and record the category (micro, small or medium) in your vendor master.
• Check the category each year. A supplier can move between categories as its investment and turnover change.
• Traders need care. The Samadhaan FAQ says Facilitation Councils do not admit claims from units registered as trading units or under NIC codes 45, 46 and 47. Whether payments to traders fall under section 37(2)(g) is not settled by the texts checked for this article. Take advice for your own supplier list.
• Companies with dues to MSEs beyond 45 days also file a half-yearly return in MSME Form I with the Ministry of Corporate Affairs, under an order of 22 January 2019. See private limited annual compliance.

Examples

The dates below are illustrations; check your own contract and delivery records.

1. Written terms of 30 days, paid late within the same year. A manufacturer receives goods from a small enterprise on 10 January 2027 and raises no objection. The written terms are 30 days, so payment is due by 9 February 2027. It pays on 25 February 2027. The payment is late, so interest under section 16 is owed from 10 February. But it was paid within tax year 2026-27, so the expense is still deductible in tax year 2026-27.

2. No written agreement, purchase in March. A trader buys services from a micro enterprise rendered on 25 March 2027, with no written terms. The 15-day period runs from acceptance, so the appointed day falls in early April 2027. If the trader pays in early April before the appointed day, it is on time and the expense is allowed in tax year 2026-27. If it pays on 20 May 2027, the payment is late. The expense then moves to tax year 2027-28, even though the return for 2026-27 has not yet been filed.

3. A contract that says 60 days. A buyer's purchase order with a small supplier allows 60 days. Section 15 caps the agreed period at 45 days from acceptance, so a payment on day 60 is beyond the time limit. The deduction waits for the year of payment, and the supplier can claim section 16 interest for the delay.

4. Goods rejected in writing. A buyer objects in writing on day 8 to a defective batch, and the supplier replaces it on day 20. The day of acceptance becomes day 20, and the payment period runs from then.

What else does the MSMED Act say about late payments?

• Disclosure (s.22): a buyer whose accounts are audited under any law must show in its annual accounts the principal and interest unpaid to suppliers at year end, interest paid, and interest accrued.
• Interest not deductible (s.23): the MSMED Act says interest payable under it is not allowed as a deduction in computing income under the Income-tax Act 1961. Ask your adviser how this applies under the 2025 Act.
• Disputes (s.18): either party can refer the dispute to the Micro and Small Enterprises Facilitation Council. The Council first conciliates and then arbitrates, and must decide within 90 days of the reference. A buyer challenging the award in court must first deposit 75% of the amount (s.19).
• Filing: the MSME Samadhaan portal now asks suppliers to file new delayed-payment applications on the MSME ODR portal.

Checklist for buyers

1. Tag every vendor as micro, small, medium or not registered, with the Udyam number on file.
2. Put written payment terms of 45 days or less in purchase orders with micro and small suppliers.
3. Record the delivery date and any written objection, because the clock starts from acceptance.
4. Run a monthly ageing report of MSE payables against the 15-day or agreed deadline.
5. At year end, list unpaid MSE dues beyond the deadline. Those amounts are not deductible until paid.
6. Give your auditor the MSE schedule; audited buyers must disclose these amounts in their accounts.

Common mistakes

• Assuming the return-date grace applies. It does not apply to MSE dues.
• Writing 60 or 90-day terms. The Act caps agreed terms at 45 days from acceptance.
• Ignoring the 15-day default. Without written terms, the deadline is short.
• Not checking Udyam status. A supplier's category decides whether the rule applies.
• Quoting "43B(h)" for the current year. From tax year 2026-27, cite section 37(2)(g).

What to do now

Review your payables before 31 March 2027 so that late MSE bills for tax year 2026-27 are paid within the year. Small suppliers should keep their Udyam registration current, since it is the basis for these protections. The Income-tax Act 2025 overview explains the other section changes.

To review your vendor list, payment terms or the tax effect of late payments, ask our expert team or book a consultation.