FreeComplianceMSME 45-day payment rule and its income-tax impact
If your company buys from a micro or small enterprise, it must pay within 45 days (or 15 days if there is no written agreement). Paying late now has an income-tax cost as well as a legal one.
The MSMED Act rule
- Section 15: pay within the agreed period, which cannot exceed 45 days from acceptance of goods or services. Without an agreement, 15 days.
- Section 16: delayed payments carry compound interest with monthly rests at three times the RBI bank rate.
- The interest is not deductible for income tax.
The income-tax rule
From the financial year 2023-24, an expense owed to a micro or small enterprise is allowed as a deduction only in the year it is actually paid, if payment is made after the MSMED Act deadline. Unpaid amounts at year end are added back to taxable income.
This applies to suppliers registered under Udyam as micro or small manufacturers and service providers. Traders are generally excluded, and so are medium enterprises.
Frequently asked questions
This guide is general information, not legal advice. Government fees and procedures change; confirm current figures before you file.
- MSME-1: reporting dues to micro and small enterprises
Which companies must file MSME-1, what to report, half-yearly due dates, and how it ties to the 45-day payment rule.
- Udyam registration: MSME registration for companies
How to get Udyam (MSME) registration for a private limited company, documents needed, benefits, and keeping it updated.
- MSME classification: micro, small and medium enterprise limits
Investment and turnover limits for micro, small and medium enterprises in India, and how exports and upgrades are treated.