The 45-Day MSME Payment Rule: What Buyers Must Actually Do

The 45-day MSME payment rule requires an Indian buyer to pay a registered micro or small supplier within the agreed date — capped at 45 days, or 15 days with no written agreement (MSMED Act, Section 15). Pay late and two things bite: compound interest at three times the RBI bank rate (Section 16), and — under Section 43B(h) of the Income Tax Act — no expense deduction until you actually pay, which inflates your taxable profit. It covers Udyam-registered micro and small suppliers only.

This guide sets out what the rule says, what it costs to ignore, and the practical playbook — including how supply chain finance lets you pay MSMEs on time while keeping your own payable terms long.

This is the demand-side forcing-function beneath anchor-led supply chain finance: it turned slow MSME payment from a relationship issue into a tax-and-interest issue, and that is why CFOs are redesigning their payables.

What the 45-day rule actually says

Two sections of the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 carry the rule:

• Section 15 — the payment window. Where a micro or small supplier delivers goods or renders services, the buyer must pay on or before the date agreed in writing. That agreed date cannot exceed 45 days from acceptance (or deemed acceptance) of the goods/services. Where there is no written agreement, payment is due within 15 days.
• Section 16 — the interest on delay. If the buyer fails to pay within the Section 15 window, it is liable to pay compound interest, with monthly rests, at three times the bank rate notified by the RBI — running from the appointed day, irrespective of any agreement to the contrary.

Two further points sharpen the teeth. The interest under Section 16 is not allowed as a deduction under the Income Tax Act (Section 23 of the MSMED Act). And the supplier can drive recovery through the MSME Samadhaan portal and the Micro and Small Enterprises Facilitation Council (MSEFC), which has a statutory disposal timeline.

Who is covered — the scope traps that trip up buyers

This is where most buyers get it wrong. The rule does not cover every vendor on your ledger.

The single most common error is treating any Udyam-registered vendor as protected. A medium enterprise gets none of this, and a trader does not bring you 43B(h) exposure even if it is on Udyam.

The Section 43B(h) tax teeth

The MSMED Act interest existed for years and was widely ignored. What changed the conversation was Section 43B(h) of the Income Tax Act, inserted by the Finance Act 2023 and effective from AY 2024-25 (1 April 2024).

The mechanism is blunt. Any sum payable to a micro or small enterprise beyond the MSMED-Act time limit (15/45 days) is deductible only in the year of actual payment, not the year of accrual. So a buyer who closes the year with an overdue MSME payable cannot claim that purchase as an expense until it pays — its taxable profit, and tax outflow, rise for that year. The deduction is not lost forever, but it is deferred, and the cash cost of the deferral is real.

Combine the two regimes and a late payment to a micro/small supplier can cost a buyer: (1) the Section 43B(h) deduction deferral, plus (2) non-deductible compound interest at 3× the bank rate. The rule effectively makes paying MSMEs on time the cheaper option.

What buyers must actually do

A practical compliance checklist for the payables and treasury team:

1. Tag your vendor master by Udyam status. Capture and periodically refresh each vendor’s Udyam classification (micro / small / medium / not registered). You cannot manage what you have not flagged.
2. Set agreed payment terms in writing — at 45 days or less. A written agreement raises your ceiling from 15 to 45 days; without one, you are on a 15-day clock you almost certainly cannot meet.
3. Re-engineer the approval-to-pay cycle for micro/small vendors. The bottleneck is usually internal — GRN, three-way match, approvals — not cash. Fast-track the micro/small queue.
4. Reconcile the year-end exposure before the books close. Identify overdue micro/small payables ahead of 31 March; clear them or accept the 43B(h) add-back consciously.
5. Solve the structural conflict with finance, not just process. Most buyers want to pay MSMEs fast and keep their own working-capital cycle long. Those two goals collide — unless you put a financier between them.

How supply chain finance squares the circle

Here is the move most “43B(h)” articles miss. A buyer can satisfy the 45-day rule and preserve its own payable terms by inserting a financier — through reverse factoring (vendor finance), on bank, NBFC or TReDS rails.

The structure is simple: the financier pays the MSME supplier early — within days of an approved invoice — and the buyer pays the financier later, on its preferred 60-, 90- or 120-day term. The MSME gets paid inside the statutory window — so the buyer’s 43B(h) deduction is protected and no Section 16 interest accrues — while the buyer’s own cash cycle is unchanged. On TReDS specifically, the financing is auction-discovered (indicative ~6.5–9% p.a.) and priced off the buyer’s credit rating, not the small supplier’s, and is without recourse to the MSME once the buyer accepts the invoice.

We unpack that bridge in does TReDS help with 43B(h) compliance, and the broader anchor structure in how supply chain finance works and TReDS invoice financing for MSMEs. One caveat for the buyer’s own accounts: reverse factoring is not automatically off-balance-sheet — whether the payable stays a trade payable or is reclassified as borrowing is an Ind AS 109 judgement that turns on the programme’s terms.

This matters at scale because MSME working capital is genuinely starved: the RBI’s U.K. Sinha Expert Committee (2019) put the MSME credit gap at roughly ₹20–25 lakh crore. The 45-day rule is the State pushing that liquidity through the supply chain; SCF is the instrument that lets a buyer comply without bleeding its own cash.

FAQ

What is the 45-day MSME payment rule in India? Under Section 15 of the MSMED Act, 2006, a buyer must pay a registered micro or small supplier within the date agreed in writing, capped at 45 days from acceptance of goods or services. With no written agreement, the limit is 15 days. Delay attracts compound interest at three times the RBI bank rate under Section 16.

Does the 45-day rule apply to all MSME suppliers? No. It applies only to micro and small enterprises that are Udyam-registered at the time of supply; medium enterprises are excluded. For the Section 43B(h) tax consequence specifically, wholesale and retail traders are also excluded, even if they hold Udyam registration. Buyer registration status is irrelevant — what matters is the supplier’s classification.

What is the penalty for paying an MSME late? Two consequences. Under Section 16 of the MSMED Act, the buyer owes compound interest (monthly rests) at three times the RBI bank rate, and that interest is not tax-deductible. Under Section 43B(h) of the Income Tax Act, the purchase deduction is deferred until the year of actual payment, raising the buyer’s taxable profit for the year.

Is the 15-day or 45-day limit the one that applies to me? It depends on whether you have a written agreement. With no written agreement, payment is due within 15 days of acceptance. A written agreement can extend the term up to a hard ceiling of 45 days — but no further. Any contractual term beyond 45 days is unenforceable against the MSMED Act for a micro/small supplier.

How can a buyer pay MSMEs on time without shortening its own cash cycle? Use supply chain finance — typically reverse factoring on bank, NBFC or TReDS rails. A financier pays the MSME supplier early, within days, while the buyer settles with the financier on its own longer term. The MSME is paid inside the 45-day window (protecting the buyer’s 43B(h) deduction and avoiding interest), and the buyer’s working-capital cycle is preserved.

Pay MSMEs on time without giving up your cash cycle — talk to Finnova about redesigning your payables. Channel-agnostic across banks, NBFCs and all four TReDS platforms, CA- and ex-banker-led. Part of Finnova’s ₹4,250 Cr+ mobilised across 100+ corporate-finance mandates since 2011.