AS | Ankit Sarawagi|Founder, CFOmatrix·July 2026·9 min read | Worked example inside |
- The rate is statutory: 3x the RBI bank rate, compounded with monthly rests, from the appointed day. A recent bank rate of 6.5% gives roughly 19.5% a year.
- It compounds monthly. Each month the interest is added to the balance, so the next month is charged on a higher figure. Compounding, not the headline rate, is what makes it bite.
- It overrides your contract. A lower agreed rate, or no rate at all, is irrelevant. Section 16 wins.
- Tax asymmetry: the interest is taxable income for you, but the buyer cannot deduct it (MSMED Sec 22/23) and must disclose the dues in its accounts.
- On a ₹10 lakh invoice held about a year, the interest lands near ₹2 lakh (illustrative). Our free Excel calculator does the month-by-month maths for you.
| 3x bank rate The statutory multiple set by Section 16 of the MSMED Act | ~19.5% p.a. Illustrative effective rate at a 6.5% bank rate, monthly rests | ~₹2 lakh Illustrative interest on a ₹10 lakh invoice held ~12 months |
| 1. The Section 16 formula 2. How the rate is built up 3. A worked example, month by month | 4. Why monthly compounding matters 5. The tax and disclosure angle 6. How councils compute it 7. FAQ |
The Section 16 Formula
The whole of MSME delayed payment interest sits in one sentence of law. Section 16 of the MSMED Act 2006 says that where a buyer fails to pay by the appointed day, it must pay interest at three times the bank rate notified by the RBI, compounded with monthly rests. Three parts of that sentence do all the work, and each one is fixed by statute rather than by your contract.
Put simply, the monthly interest is the outstanding balance times one-twelfth of the annual rate, and that interest is rolled into the balance before the next month is calculated. You never need a contract clause to charge it, and, as we will see, a contract cannot reduce it either. If you want the exact rupee figure for your own invoice, our downloadable calculator applies this formula automatically.
The “bank rate” in Section 16 is the RBI bank rate, not the repo rate and not your bank’s lending rate. It is a specific rate the RBI notifies, and it can change during the period your invoice stays unpaid, in which case the interest is computed rate-by-rate over time.
How the Rate Is Built Up
Because the multiple is fixed at three, the whole rate turns on one input: the RBI bank rate. Here is how a recent bank rate translates into the effective annual figure. These numbers are illustrative and move whenever the RBI changes the bank rate.
| RBI bank rate (notified) | 6.5% |
| Statutory multiple (Section 16) | × 3 |
| Effective annual rate | ~19.5% a year |
| Monthly rate applied (annual ÷ 12) | ~1.625% a month |
| Compounding | Monthly rests |
So the buyer is looking at roughly 1.625% a month, compounding. If the RBI raises or cuts the bank rate mid-dispute, the multiple stays at three and the effective rate simply tracks it. That is why any real calculation is done period by period rather than with a single flat percentage.
A Worked Example, Month by Month
Nothing makes the point like watching it run. Take a single invoice of ₹10,00,000 from a micro supplier, unpaid past the appointed day, at the illustrative rate of about 1.625% a month (roughly 19.5% a year) compounding monthly. Here is how the balance climbs over about twelve months. A few rows are shown; the calculator fills in the rest.
| Month | Opening balance | Interest this month | Closing balance |
| 1 | ₹10,00,000 | ₹16,250 | ₹10,16,250 |
| 2 | ₹10,16,250 | ₹16,514 | ₹10,32,764 |
| 3 | ₹10,32,764 | ₹16,782 | ₹10,49,546 |
| . . . months 4 to 11 continue the same way, each on a higher balance . . . | |||
| 12 | ₹11,80,528 | ₹19,184 | ₹11,99,712 |
| Total interest after ~12 months | ~₹1,99,712 | ||
Twelve months turns a ₹10 lakh principal into roughly ₹12 lakh: close to ₹2 lakh of interest on top of what was already owed. And the balance keeps climbing every month the buyer delays, which is exactly the pressure the statute is designed to create.
→ Download the free MSME delayed-payment interest calculator (Excel) and drop in your own invoice amount, dates and bank rate to get the exact month-by-month figure.
Why Monthly Compounding Matters
People often assume interest is simple: rate times principal times time. Section 16 does not work that way, and the difference is real money. Under simple interest, each month adds the same fixed amount. Under monthly compounding, each month is charged on a balance that already includes last month’s interest, so the additions grow. Over a year on a ₹10 lakh invoice the two diverge as follows.
There is also a growth story hidden in the earlier table. Watch how the “interest this month” column climbs from about ₹16,250 in month one to over ₹19,000 by month twelve, even though the rate never changed. That rising bar is compounding at work: the same percentage on a bigger and bigger balance.
When you send a demand notice, quote the compound figure, not a rough simple-interest estimate. It is both the correct statutory amount and the larger, more persuasive number. Attach the month-by-month working so the buyer cannot argue about how you got there.
The Tax and Disclosure Angle
Here is the part buyers hate most, and suppliers should understand fully. The interest is not just a bigger bill; it is a bill the buyer pays out of post-tax money and must own up to in its accounts.
So the true cost to a delaying buyer is worse than the headline 19.5%. It pays the interest, gets no tax relief on it, and has to reveal the overdue amount to auditors, lenders and anyone reading its accounts. That reputational and tax drag is often what actually moves a stalled invoice. This sits alongside the more famous Section 43B(h) rule, which separately denies the buyer a deduction on the purchase itself until it pays you.
Do not waive the interest casually to “keep things friendly.” Because the amount is fixed by statute and disallowed to the buyer for tax, writing it off is a real concession, not a formality. If you settle for principal only, record that you are consciously giving up a statutory entitlement.
How the Councils Compute It
When a case reaches the Micro and Small Enterprises Facilitation Council through MSME Samadhaan, the council does not eyeball a round number. It works the interest out on the same statutory basis you should use in your own calculation:
- Month by month from the appointed day. The council counts from the day after the 15 or 45 day period, computing interest for each month and rolling it into the balance (monthly rests), exactly as in the worked example above.
- Rate as notified from time to time. It applies three times the RBI bank rate in force for each period. If the bank rate changed while the invoice was outstanding, the interest is split across those periods at the respective rates.
- Principal plus interest in the award. The binding award covers the unpaid principal and the accrued compound interest together, and interest can continue to run until actual payment.
Because the method is mechanical, a clean, dated computation in your application makes the council’s job easy and your claim hard to dispute. The full pillar guide to recovering MSME dues walks through the wider filing and MSEFC process; this post is the arithmetic that sits inside it.
Treat the 19.5% compound clock as the real price of your credit. If a customer routinely pays two months late, that is not a minor annoyance: it is a double-digit financing cost you are absorbing on their behalf. Pricing that in, or invoicing the statutory interest, turns a soft receivable problem into a hard number the buyer has to answer for.
“The interest is not a bargaining chip you invent for a notice. It is a fixed statutory number, compounding every month, that the buyer cannot even claim as a tax expense. Calculate it properly and it argues for you.”
Ankit Sarawagi, CFOmatrixFrequently Asked Questions
What rate of interest can an MSME charge on a delayed payment?
Under Section 16 of the MSMED Act 2006, the rate is three times the RBI bank rate, compounded with monthly rests. At a recent bank rate of 6.5%, that works out to about 19.5% a year. The rate is fixed by statute, not negotiated, and it moves whenever the RBI changes the bank rate.
Is MSME delayed-payment interest simple or compound?
It is compound interest. Section 16 requires compounding with monthly rests, which means each month the unpaid interest is added to the principal and the next month’s interest is charged on the higher balance. Over a year this produces noticeably more than simple interest at the same headline rate.
From which date does MSME interest start running?
Interest runs from the appointed day, which is the day immediately after the payment period ends. That period is the date agreed in writing, capped at 45 days, or 15 days if there is no written agreement, counted from acceptance of the goods or services. No reminder or notice is needed for interest to begin.
Is the delayed-payment interest taxable for the supplier and deductible for the buyer?
For the supplier the interest is income and is taxable in the normal way. For the buyer it is expressly not allowed as a deduction: under Sections 22 and 23 of the MSMED Act the interest is disallowed for income tax, so the buyer effectively pays it out of post-tax money and must also disclose the unpaid amount in its financial statements.
Does my contract’s interest clause apply instead of Section 16?
No. Section 16 overrides any agreement between the parties. Even if your contract specifies a lower interest rate, or no interest at all, the statutory rate of three times the bank rate compounded monthly applies to a registered micro or small supplier. A contract cannot contract out of the MSMED Act.
What is the current effective rate of MSME delayed-payment interest?
It depends on the prevailing RBI bank rate. At a recent bank rate of 6.5%, three times that is about 19.5% a year, compounded monthly. Because the bank rate is notified by the RBI from time to time, the effective rate changes with it, and the council computes interest month by month using the rate as notified for each period.
- The 45-Day Payment Rule Explained (Section 15)
- Filing on MSME Samadhaan: A Step-by-Step Guide
- Section 43B(h): The Tax Rule That Forces On-Time MSME Payment
Start with the full MSME delayed-payment recovery guide, or download the interest calculator.
Sources: Micro, Small and Medium Enterprises Development (MSMED) Act, 2006, Section 16 (rate and monthly compounding) read with Section 15 (appointed day) and Sections 22 and 23 (disclosure and tax disallowance of the interest); RBI bank rate as notified from time to time. All rupee figures, rates and the worked example are illustrative and clearly labelled; actual amounts depend on the invoice, the exact dates and the bank rate in force for each period.
This is general educational information, current to mid-2026, and not legal or tax advice. Rates, forms and procedures change; verify the current position or consult a professional before acting on a specific matter.
AS | Founder, CFOmatrix | Finance Strategy & Equity Compliance CFOmatrix is a knowledge platform focused on how finance actually works inside growing companies. This guide draws on first-hand experience computing and claiming MSME delayed-payment interest, alongside the current statutory and tax position. |