If you buy from a micro or small enterprise registered under Udyam, pay within 15 days of accepting the goods, or by the date agreed in writing, which can never be more than 45 days. If you pay later, the unpaid amount is not allowed as a business expense in that year’s income tax; it is allowed only in the year you actually pay.
The supplier can also claim compound interest at three times the RBI bank rate. This article explains the rule from both sides: as a buyer who must pay on time, and as a supplier who wants to be paid on time.
This is a plain summary, not legal advice. How the rule applies depends on your facts, so check with your CA.
Where the rule comes from
Two laws work together:
- The MSMED Act, 2006 sets the time limit. Section 15 says the buyer must pay on or before the date agreed in writing, or, if there is no agreement, before the “appointed day”. The agreed period can never be more than 45 days. Section 16 adds compound interest with monthly rests at three times the bank rate notified by the RBI if the buyer pays late.
- Income tax links your deduction to that limit. Section 43B(h) of the Income-tax Act, 1961, added from the financial year 2023-24, allows a payment to a micro or small enterprise made after the MSMED time limit as an expense only in the year it is actually paid.
What changed from 1 April 2026
The Income-tax Act, 2025 replaced the 1961 Act from 1 April 2026. The same rule now sits in section 37(2)(g), under “deductions allowed on actual payment basis only”. Section 37(3) gives a grace period for some payments made before the return due date, but it does not apply to clause (g). So, as before, paying the supplier before you file your return does not save the deduction for the earlier year.
In short:
| Year | Law | Where the rule is |
|---|---|---|
| Up to 2025-26 (year ending 31 March 2026) | Income-tax Act, 1961 | Section 43B(h) |
| Tax year 2026-27 onwards | Income-tax Act, 2025 | Section 37(2)(g) |
Who it covers
- Your supplier must be a micro or small enterprise. Medium enterprises are not covered.
- The supplier should hold a valid Udyam registration. Ask for the Udyam number and keep a copy with the vendor record.
- Traders. The Ministry of MSME’s office memorandum of 28 June 2024 says retail and wholesale traders who registered on Udyam only to get priority-sector bank loans do not fall under section 15 of the MSMED Act. Whether a purchase from a trader falls under the income tax rule is a question for your CA.
How to count the days
The clock starts on the day of acceptance. The MSMED Act defines it like this:
- Normally it is the day the goods are delivered or the service is given.
- If you object to the goods in writing within 15 days of delivery, it is the day the supplier removes your objection.
- If you make no written objection within 15 days, the goods are treated as accepted on the day of delivery. This is “deemed acceptance”.
Then:
- No written agreement on payment terms: pay within 15 days of acceptance.
- Written agreement: pay by the agreed date, and that date can be at most 45 days after acceptance. An agreement for 60 or 90 days does not stretch the limit.
An example
Goods delivered on 1 February 2026, no written objection.
| Payment terms | Pay by |
|---|---|
| Nothing agreed in writing | 16 February 2026 |
| 30 days agreed in writing | 3 March 2026 |
| 60 days agreed in writing | 18 March 2026 (45 days is the maximum) |
Note that the count runs from the date of acceptance, not from the invoice date. If the goods arrive a few days after the invoice, use the delivery date. Keep your goods receipt notes; they are your proof.
The year-end trap
The deduction is tested at the end of the year. Say goods worth Rs 4,50,000 from a small enterprise were accepted on 1 March 2026, with no written terms. The limit was 16 March 2026. If the bill was still unpaid on 31 March 2026, the Rs 4,50,000 could not be claimed as an expense for 2025-26, even if you paid on 10 April. It becomes an expense in the year you paid.
For a manufacturer with large purchases in February and March, this can add lakhs to the taxable profit for one year. It is wise to run a supplier payment check in the first half of March.
If you are the buyer
- Mark MSME suppliers. Collect Udyam numbers and note “micro” or “small” against each vendor.
- Write the payment terms. Put the credit period on every purchase order, within 45 days.
- Track the pay-by date for every bill, counted from acceptance, not just the invoice date.
- Pay MSME bills first when cash is short. A late payment to them can cost you interest and pushes your deduction to a later year.
- Review in March. List every MSME bill that will cross its limit before 31 March.
If you are the supplier
- Register under Udyam and print the Udyam number on your quotations and invoices.
- Agree terms in writing, within 45 days, on the purchase order or your quotation.
- Keep delivery proof with the date the customer received the goods.
- Remind politely, and mention the rule to the customer’s accounts team. Most buyers want to keep their deduction.
- If payment is still delayed, you can file a case on the MSME Samadhaan portal. Any micro or small enterprise with a valid Udyam registration can apply. The case goes to the Micro and Small Enterprises Facilitation Council of your state, which tries conciliation and then arbitration.
Interest on late payment
Under section 16 of the MSMED Act, a buyer who pays late owes the supplier compound interest with monthly rests at three times the bank rate notified by the Reserve Bank of India, from the date the payment fell due. The RBI publishes the current bank rate on its website. Ask your CA before you raise an interest claim on a customer.
Checklist
- Every supplier marked as micro, small, medium or not registered, with the Udyam number
- Payment terms written on every purchase order, never more than 45 days
- Goods receipt date recorded for every bill
- Pay-by date worked out for every MSME bill: 15 days without terms, up to 45 days with
- MSME bills reviewed in the first half of March
- As a supplier: Udyam number on your invoices and terms agreed in writing
- Questions on your own case taken to your CA
Tracking pay-by dates in SmartWorker
SmartWorker shows an MSME pay-by date on purchase orders from suppliers you mark as MSME (counted from the goods receipt or delivery date, never more than 45 days) and, if your own company is an MSME, on your invoices. You enter the agreed days; the app does not work out the 15-day case for you. Invoices and payments come in from Tally; import from Zoho Books. Book a free demo