In short. Getting the Section 16 figure right is a three-part job. First, pin down the day the money became due: 15 days after acceptance, or the agreed date if there was one, and never later than 45 days. Second, multiply the RBI bank rate by three. Third, compound that every month on the unpaid balance until the buyer pays. We've written this for micro and small suppliers with Udyam registration, the accountants who keep their books, and buyers checking a demand. With a clean ledger, it's a day or two of work. Begin with delivery dates and any written complaint.
Is this your situation?
- You run a small unit with a Udyam certificate, and one particular buyer always pays three or four months late. Every single time.
- You've read that the law gives you three times the bank rate. Turning that into a figure in rupees is where you get stuck.
- The buyer has paid in bits, cut TDS and sent debit notes you never agreed to, and now the ledger looks nothing like your invoices.
- You typed the numbers into a calculator on some website and got a total your own CA couldn't make sense of.
- Your MSME Samadhaan filing, or a legal notice, is nearly ready, and you want the interest column to survive the buyer's reply.
- You're the buyer. A demand has come in with a huge interest figure, and someone in finance has been told to check it row by row.
- The bank rate moved while your money was stuck, and nobody can tell you which rate goes in the sheet.
How the Section 16 calculation works
The section itself is short. Under Section 16 of the Micro, Small and Medium Enterprises Development Act, 2006 (the MSMED Act), a buyer who pays a registered micro or small supplier late owes compound interest, with monthly rests, at three times the bank rate notified by the Reserve Bank of India. The clock starts on the day payment fell due. And the section opens with "notwithstanding anything contained in any agreement". So a purchase order that says "no interest", or "interest at 12 percent", can't shrink the figure. Our separate note on whether an MSME gets interest even when the contract says no goes into that.
You only ever need four inputs. How much stayed unpaid. When it fell due. What the bank rate was in each month. And the date you're counting up to. Part payments, TDS, debit notes and a pile of invoices just add detail to those four. When a supplier shows us a figure that's wrong, the maths is rarely the culprit. It's nearly always the due date.
This page deals with arithmetic and dates. Do you qualify for the three-times rate at all? That turns on registration, supplier status and the kind of transaction, and we've covered it in when an MSME can claim interest at three times the bank rate. Below, we take it that you qualify and simply want a number that holds.
The provisions behind the figure
Section 2(b) and its Explanation, MSMED Act, 2006
Gives you the "appointed day": count 15 days from acceptance or deemed acceptance, and it's the day after. The Explanation treats the actual delivery date (or the date the service was rendered) as the day of acceptance. A written objection from the buyer inside 15 days of delivery pushes acceptance to the day you cure the problem. Without one, delivery day is deemed acceptance.
Section 15, MSMED Act, 2006
Payment is due on the date the parties fixed in writing. If they fixed nothing, it's due before the appointed day. Under the proviso, no agreed period can run past 45 days from acceptance or deemed acceptance, so 90 days in a purchase order becomes 45 here.
Section 16, MSMED Act, 2006
When the buyer misses the Section 15 deadline, compound interest with monthly rests becomes payable at three times the bank rate notified by the Reserve Bank, from the appointed day or the day after the agreed date. The bank rate is what the RBI fixes under Section 49 of the Reserve Bank of India Act, 1934.
Sections 17, 22 and 23, MSMED Act, 2006
Section 17 puts the buyer on the hook for principal plus Section 16 interest. Under Section 22, a buyer with audited accounts has to show the unpaid principal and interest due to micro and small suppliers in its annual accounts. Section 23 takes away the income tax deduction for this interest. That's partly why a big buyer's finance team fights the interest line harder than the principal.
From which date does interest start?
Begin with acceptance. For most supplies that's nothing more than the day the truck unloaded at the buyer's gate. Your evidence is the signed challan, the e-way bill, the transporter's POD or the buyer's GRN. Use whichever is clearest. Services work the same way, using the day the work was done: a site visit, the close of a month's maintenance, the handover of a report. Your invoice may be dated days earlier or later. It doesn't matter. Delivery is what counts.
Two questions next. First, did a written objection arrive within 15 days? That can be a rejection note, an email about quality, or a short-supply report. If one did, acceptance moves to the day you put things right, but only for the goods or services complained about. A complaint that surfaces on day 40, or only once you've asked for money, changes nothing. Second, did you agree payment terms in writing? If so, the agreed date applies, capped at 45 days from acceptance. If not, the buyer had to pay before the appointed day, which works out to 15 days.
Interest begins the day after the due date. Take goods delivered on 5 January 2026, no complaint. No written credit term: the 15 days end on 20 January, and interest begins on 21 January. A written 30-day term: interest from 5 February. A written 60-day or 90-day term gets cut to 45, so the money was due by 19 February and interest starts on 20 February. For more on the 45-day payment rule, including what counts as a written agreement, see our separate note.
Which bank rate, and what's three times it?
Don't confuse the bank rate with repo. They travel together, but they aren't the same number. The RBI currently keeps the bank rate equal to its Marginal Standing Facility rate, and that sits 25 basis points over repo. Repo was cut several times in 2025. From December 2025 the bank rate stood at 5.50 percent, giving a Section 16 rate of 16.50 percent a year. Then, on 7 October 2026, the Monetary Policy Committee took repo up to 5.50 percent and the bank rate went to 5.75 percent. From that day the Section 16 rate is 17.25 percent a year. All of this can change at the next policy review, so pull the RBI press releases for your claim period before filing.
What if the rate moves while you're still waiting to be paid? The Act is silent on whether one rate (the one on the due date) runs all the way through, or each month takes the rate then in force. The Calcutta High Court, in V.K. Patel and Co. v. Simplex Infrastructure (2024), took the second view, reading monthly rests to mean each monthly interval uses the RBI rate current at the time. We prepare claims that way too. It's defensible, and it's fair to both sides. Rates rise, the supplier gains. They fall, the buyer does.
In practice you'll want a little rate table in the working. List each bank rate, the day it started, and the tripled figure. A claim stretching from 2023 to 2026 might carry four or five of them. Note the RBI press release dates next to each line. Anyone checking, arbitrator or opposing accountant, can then verify them quickly.
What compound interest with monthly rests really means
Think of it as a running balance. Every month, the interest for that month joins the amount owed, and the following month's interest is charged on the larger total. In other words, interest on interest, added twelve times a year. Civil courts usually give simple interest under Section 34 of the Code of Civil Procedure. Section 16 doesn't.
Divide the yearly rate by twelve. 16.50 percent becomes 1.375 percent a month. 17.25 percent becomes 1.4375 percent. Each month's interest is the opening balance times that monthly rate, and you add it on to get the closing balance. Where the rate stays fixed, you can skip the month-by-month and use a formula: final amount equals principal multiplied by (1 plus monthly rate) to the power of the number of months. On Rs 10 lakh left unpaid for 12 months at 1.375 percent a month, you reach about Rs 11.78 lakh. That's interest of close to Rs 1.78 lakh. Simple interest would have given Rs 1.65 lakh.
Early on, compounding barely shows. Give it a couple of years, though. On an invoice three years overdue, it can push the figure up by a fifth or more compared with simple interest. Buyers' counsel know this, which is why they sometimes argue for simple interest. Don't make their argument for them by filing a simple-interest figure when the Act gives you compounding.
Working out MSME delayed payment interest, step by step
Do it in Excel or Google Sheets, a tab per invoice, a row per month. One invoice you can manage by hand. With twenty, errors are almost certain.
Make a list of every invoice that was paid late or not at all
For each, note its number and date, the amount with GST, and when the goods or services were delivered according to your challans. Don't forget invoices the buyer has since cleared. Interest for the late period is still claimable.
Settle the acceptance date for each
That's the delivery or service date, unless a written objection came within 15 days. If one did, record when it came and when you resolved it. For the goods it covered, the resolution date is your acceptance date.
Settle the due date
Add any written credit period to the acceptance date, stopping at 45 days. No written period? Then it's the 15th day after acceptance. Interest begins the following day.
Draw up the rate table
For each period the money was outstanding, write three times the RBI bank rate and the dates it applied. Divide by twelve for the monthly figure.
Run the monthly rests
Opening balance times the month's rate gives the interest. Add it, and that's next month's opening balance. For a broken final month, use days: balance times annual rate times days, divided by 365.
Knock off each payment on the day it arrived
Reduce the balance on the payment date. Where the buyer didn't say what a payment was for, Indian courts generally let it go first to interest due and then to principal, unless there was an agreement otherwise or the buyer clearly tied it to a specific invoice at the time.
Add up and check
Total the interest for each invoice, then across all of them. Recheck one invoice with the formula. Finally, put your closing principal next to the buyer's ledger. Any difference needs explaining before you file.
What you end up with is a few pages. Up front, a summary of principal and interest invoice by invoice. Then the rate table. Then the monthly schedules that support it. An arbitrator wants exactly this, and it's what goes with your reference on MSME Samadhaan.
A worked example (invented): one invoice, one part payment, seven months
Treat this as a made-up illustration, nothing more. Picture a Sector 63, Noida unit that makes corrugated boxes. It got Udyam registration as a micro enterprise in 2022 and sells cartons to an FMCG company based in Gurugram. One invoice, Rs 8,40,000 with GST. Delivered 5 January 2026. The purchase order reads "payment within 60 days", and no objection came in the first 15 days.
Sixty days gets cut to 45. Payment was therefore due by 19 February 2026, with interest from 20 February. We'll keep the bank rate at 5.50 percent for the whole stretch, which is right for most of 2026. Three times that: 16.50 percent a year, 1.375 percent a month.
Month one (20 February to 19 March) gives Rs 11,550 of interest on the Rs 8,40,000 principal. The balance becomes Rs 8,51,550. Month two adds Rs 11,708.81, making Rs 8,63,258.81. Month three, ending 19 May, adds Rs 11,869.81 for a balance of Rs 8,75,128.62. Accumulated interest so far: Rs 35,128.62.
Then, on 20 May, Rs 3,00,000 arrives. Nothing says what it's meant to cover. Interest gets paid off first, using Rs 35,128.62, and the remaining Rs 2,64,871.38 reduces principal. What's left is Rs 5,75,128.62. Pure principal.
The meter keeps going, now on the smaller balance, and it doesn't care that the buyer feels it has done its bit. June's rest adds Rs 7,908.02. July's, Rs 8,016.75. August, Rs 8,126.98, and September Rs 8,238.73. By 19 September 2026 the buyer owes Rs 6,07,419.11, which is Rs 5,75,128.62 in principal and Rs 32,290.49 in interest. Over seven months the interest totals Rs 67,419.11, if you include the slice the part payment swallowed.
Suppose the unit keeps waiting. From 7 October 2026 the bank rate went up, so later months run at 17.25 percent a year (1.4375 percent a month). The odd 15 days between 20 September and 4 October, at 16.50 percent on a day basis, add roughly Rs 4,119.
The same example, laid out as a schedule
| Monthly rest in 2026 | Balance at start (Rs) | Rate that month | Interest added (Rs) | Received (Rs) | Balance at end (Rs) |
|---|---|---|---|---|---|
| 20 February to 19 March | 8,40,000.00 | 1.375% | 11,550.00 | nil | 8,51,550.00 |
| 20 March to 19 April | 8,51,550.00 | 1.375% | 11,708.81 | nil | 8,63,258.81 |
| 20 April to 19 May | 8,63,258.81 | 1.375% | 11,869.81 | nil | 8,75,128.62 |
| 20 May, part payment received | 8,75,128.62 | 3,00,000.00 | 5,75,128.62 | ||
| 20 May to 19 June | 5,75,128.62 | 1.375% | 7,908.02 | nil | 5,83,036.64 |
| 20 June to 19 July | 5,83,036.64 | 1.375% | 8,016.75 | nil | 5,91,053.39 |
| 20 July to 19 August | 5,91,053.39 | 1.375% | 8,126.98 | nil | 5,99,180.38 |
| 20 August to 19 September | 5,99,180.38 | 1.375% | 8,238.73 | nil | 6,07,419.11 |
Part payments, TDS, GST and debit notes
If an interest sheet is wrong, look at how it treats part payments first. Your own accountant probably sets each receipt against the oldest bill in the ledger. Fine for bookkeeping. The trouble is that the interest then never appears as owed, so it vanishes from the claim. The buyer, of course, calls every rupee principal. The tidier approach is what the example does: on the day money comes in, it pays off accrued interest first and only the balance goes to principal. Where the buyer named the invoice (say the UTR narration reads "against Inv 1142"), put it against that invoice, but the interest that invoice had already earned is still owed.
TDS is simpler. Deducted, deposited and visible in your Form 26AS? Then treat it as received on the deduction date and don't charge interest on it. Deducted but never deposited is another story, so look at 26AS before you call it paid. GST forms part of the invoice the buyer must pay. Normally, then, your principal is the full invoice amount including GST, unless the buyer settled the tax part separately.
Credit and debit notes need a careful eye. A credit note you raised for a genuine price difference or goods taken back cuts the principal, effective from the original invoice date. A debit note the buyer issued on its own, which you never accepted, doesn't. Keep disputed debit notes in their own column, work the interest out both ways, and leave the call to the arbitrator. Burying them just makes the buyer's reply look better. We've seen that happen more than once.
Many invoices, and the odd days at each end
Every invoice has its own clock. Forty bills to one buyer across two years means forty different start dates, and maybe changing credit terms as new purchase orders came in. Resist the urge to take the year-end outstanding and charge interest on it from an averaged date. It's an easy target, and more often than not it gives you less than you're owed. One schedule per invoice, plus a summary that totals them, is the way.
You'll get part-months at both ends. Rests count in monthly steps from whatever day interest began, so they needn't match calendar months at all. At the far end, the gap between the last full rest and your cut-off date is usually less than a month. Most people charge simple day-basis interest at the annual rate on that stub, without compounding it. Write that down in the working. Otherwise someone will suspect you compounded it twice.
Choose one cut-off date and keep it. On a legal notice, the notice date is fine. On a Samadhaan reference, take a date near filing and add a line asking for further interest at the Section 16 rate until payment. A cut-off that changes from notice to reference to statement of claim, with no reason given, is a gift to the other side.
Are online MSME interest calculators reliable?
For a quick sense of one invoice, sure. A few of these tools are properly built. Relying on one for an actual claim is where it goes wrong. Most apply a single rate across the board and can't take part payments. Many count from the invoice date rather than delivery, and give the buyer the full contractual credit period even past 45 days. A few compound monthly from the invoice date with no 15-day or 45-day window at all.
Check the tool against a sum you can do yourself. Enter Rs 1,00,000 at 16.50 percent for one month. The answer should be Rs 1,375. Two months should give Rs 2,768.91. Get Rs 2,750 instead and you know it's simple interest. If it has no place for payment dates or rate changes, use it as a sanity check at most, and build the proper working in a spreadsheet.
Advocate B.K. Singh tells suppliers to get the working done, or at least vetted, by the CA who already maintains their books. Arbitrators do ask who prepared a figure and on what basis. Your accountant's signature on the sheet, with the ledger and rate table behind it, counts for something. A website printout counts for very little.
Does interest keep running after you file, and after the award?
It does. Section 16 interest stops only when the buyer actually pays. So the reference should put a number on interest to the date of filing, and then ask for more at the Section 16 rate until the money arrives. That's normally how Council awards are framed. A reply, an adjournment, another adjournment: none of it pauses the meter.
Post-award interest has been settled in Delhi. A Division Bench of the Delhi High Court held in Indian Highways Management Co. v. Sowil Ltd. (2022) that Section 31(7) of the Arbitration and Conciliation Act, 1996, the general rule on post-award interest, doesn't override the MSMED Act's interest provisions. The MSMED Act is the special law. In plain words, the award doesn't switch you down from a high compound rate to a lower simple one.
Suppose the buyer moves to set aside the award under Section 34 of the Arbitration Act. Section 19 of the MSMED Act first makes it deposit 75 percent of what was awarded, interest included. See our guide on enforcement and the 75 percent deposit for the next stage. It's one more reason the interest has to be right. That figure decides how much money the buyer must put into court.
Mistakes that make an interest working easy to attack
- Counting from the invoice date. Acceptance is the starting point. Bill on the 1st, goods unloaded on the 9th, and every row of an invoice-date sheet is too high.
- Giving the full contract credit period. A 90-day purchase order still means payment was due on day 45 for this purpose. A supplier who hands the buyer 90 days gives away six weeks of interest per invoice.
- Using the repo rate, or one rate throughout. Repo runs 25 basis points under the bank rate. A single rate over three years misses at least two or three changes.
- Leaving out the buyer's written objections. A quality complaint emailed within 15 days moves the start date for that lot. Leave it out, and the arbitrator starts doubting the whole sheet.
- Calling every payment principal. You end up understating the interest due on the payment date, and your closing principal won't agree with your own books.
- Charging interest on TDS and on credit notes you accepted. The sums are small. But they make the buyer's reply look reasonable.
- No rate table, no sources. Show the rates, the dates and the formula. Otherwise the buyer will simply say the figure was made up.
How buyers usually go after the calculation
You can predict the reply. No Udyam registration on the contract date, or the supplier is really a trader. The goods were rejected, so time never started running. The supplier signed up to 90 days. Interest should be simple, or at the Arbitration Act rate. Everything paid went to principal, and this interest claim was invented once the dispute began.
There's an answer to each. It just has to be sitting in your file before the buyer says it. Have a Udyam certificate that predates the purchase order, challans signed at the buyer's stores, a dated list of every written complaint, and a sheet that already applies the 45-day cap. That takes most of the sting out of the reply. Before a claim goes in, Advocate B.K. Singh reads the working as the buyer's counsel would, row by row, and flags each line that depends on a date or a paper you haven't produced yet. Those holes get plugged before filing. Not after the reply arrives.
Limitation will come up too. Interest won't rescue a claim that is time-barred, and the Limitation Act does apply to arbitration before the Council. Our note on the time limit for an MSME delayed payment claim shows how to check this invoice by invoice.
Turning the figure into money: time and cost
| Stage | How long it usually takes | What to budget for |
|---|---|---|
| Matching ledgers and preparing the interest sheet | 1 to 2 weeks, more if there are many invoices | Time from your accountant; a CA certificate is optional |
| Legal notice, interest sheet attached | 15 to 30 days allowed for the buyer to reply | Lawyer's fee, fixed in writing beforehand |
| Filing the reference on MSME Samadhaan | About a day once everything is scanned | No portal filing fee as we write; check the current position |
| Conciliation at the Council | Often 2 to 6 months; depends on the state and how busy it is | Costs of preparing and attending |
| Arbitration by the Council or an institution | 90 days from the reference under the Act; in practice many run 6 to 18 months | Arbitration fees if the Council refers it to an institution; check the current schedule |
| Buyer's Section 34 challenge and the 75 percent deposit | Months, sometimes years, in court | Court fee and counsel's fees; the buyer puts up the deposit |
Papers to collect before you start the sheet
- The Udyam certificate, so the registration date and micro or small category are on record
- The PO, work order or supply contract, with the payment clause flagged
- Tax invoices, with GST shown separately
- Proof the buyer received the goods: challans, e-way bills, LRs or a signed POD (for services, completion reports, attendance sheets or sign-off emails)
- Each written complaint the buyer sent, with its date, and your reply showing when it was fixed
- The buyer's account from your ledger and, if they'll give it, a signed balance confirmation
- Bank statements with every receipt, its date and narration
- Form 26AS or TIS for TDS the buyer credited
- Credit notes from you and debit notes from the buyer
- RBI press releases or notifications for the bank rate in each period
Where the claim is filed, and who checks your working
Section 18(4) of the MSMED Act sends the case to the Micro and Small Enterprises Facilitation Council of the state or union territory where the supplier sits. A Noida unit therefore files within the Uttar Pradesh council set-up, and a Delhi unit before the Delhi council under the Department of Industries. The buyer being in Mumbai changes nothing. You file online through the MSME Samadhaan portal, and our step-by-step guide to filing on MSME Samadhaan walks through the form. Units spread across states should read which council has jurisdiction.
No minimum value applies. An invoice of Rs 80,000 and a contract worth Rs 8 crore end up in the same forum. Conciliation comes first, and the interest figure is frequently what the haggling is about. After that the Council arbitrates itself or hands the case to an arbitration institution. Either way the arbitrator tests your sheet against your documents. Write it so a non-accountant can follow it.
Can't use the Council, or would rather not? The same unpaid principal can be sued for in a commercial court. There interest depends on the contract and Section 34 of the Code of Civil Procedure, and it's usually lower and simple. That route is covered in the commercialcourtlawyer.com guide on interest in a recovery suit, which is worth reading side by side with this one when you're picking a forum.
What to do this week
Gather the POs and delivery papers for each unpaid bill. Against each, note three dates: when it was delivered, when (if ever) the buyer complained in writing, and the agreed payment term, capped at 45 days. Download the bank statements and your 26AS for the period. Get the bank rates for each period off the RBI website. Then the spreadsheet is an afternoon or two. You'll find out whether the interest is loose change or a large slice of what you're owed.
Don't ignore the buyer's tax angle. Late payment past the time limit also brings Section 43B(h) of the Income-tax Act, 1961 into play, along with the matching rule in the Income-tax Act, 2025. Our note on how Section 43B(h) helps MSMEs get paid explains it. One brief, courteous letter with the principal, the interest sheet and the tax point will often shift a large company's accounts team quicker than months of follow-up calls. For the full list of supporting papers, see our post on the documents needed for an MSME delayed payment case.
Want a second pair of eyes on your interest sheet and invoices before a notice goes out or you file on MSME Samadhaan? Or updates when the bank rate or the law moves? Advocate B.K. Singh's team can be reached through our contact page.
Frequently asked questions
What's the MSME interest rate on delayed payments right now?
It's three times the RBI's notified bank rate, compounded monthly. The bank rate has been 5.75 percent since 7 October 2026, so that's 17.25 percent a year. Between December 2025 and then, it was 16.50 percent. For each period of your claim, check the rate on the RBI website.
Is MSME interest simple or compound?
Compound. Monthly rests are written into Section 16 of the MSMED Act itself, and a clause in the purchase order or contract saying otherwise doesn't change that.
Can I still claim interest if the buyer has paid the invoice, just late?
You can. Payment of principal after the due date leaves the interest for the delay outstanding, and the Facilitation Council can award it, subject to the limitation period.
Should the GST portion of the invoice carry interest too?
Normally it should, since the buyer owes the whole invoice amount with GST. Where the buyer paid the tax part separately and on time, take it out of that invoice's principal.
Does it matter if my buyer is a medium enterprise or a large company?
Not at all. Section 16 protects micro and small suppliers, whoever the buyer is, including big companies and government departments. Your size is what matters, not the buyer's.
Once I file on MSME Samadhaan, does interest stop?
No. The Section 16 rate keeps running until payment is actually made. Claim interest up to the filing date in your reference, and ask for further interest until the buyer pays.
Is the Council allowed to reduce the interest I've claimed?
It can fix a mistake in the working, like a wrong start date or the wrong rate. You might also accept less as part of a settlement in conciliation. But it can't swap the statutory rate for something lower just because the buyer finds it harsh.
Do I need a chartered accountant to certify the interest figure?
No, it isn't compulsory. It helps, though. If the buyer disputes the figure, a sheet your accountant prepared or signed, backed by the ledger, bank statements and rate table, is far easier to prove.
Advocate B.K. Singh
Founder of B.K. Singh & Associates. MCA, LL.B., LL.M. More than twenty years in practice before the Supreme Court, the Delhi High Court, district and commercial courts in Delhi NCR, and tribunals.
This guide explains the law in general terms and is not legal advice. For advice on your own papers, contact the team.