What a late-paying buyer legally owes you
A buyer who owes you ₹5,00,000 and settles four months late does not owe you ₹5,00,000. They owe you ₹5,28,780.
The difference is not a late fee you have to negotiate, and it does not depend on whether your invoice mentioned interest. It is a statutory liability under the Micro, Small and Medium Enterprises Development Act, 2006 — and a buyer cannot contract out of it.
Almost no supplier claims it. Here is exactly what it is, and how to ask.
Two deadlines, and only one is negotiable
Section 15 sets when payment falls due, and it works in two cases.
Nothing agreed in writing. Payment is due within 15 days of the day the goods or services were accepted. This is the default, and it catches more businesses than people expect — a verbal understanding about credit is not an agreement in writing.
A credit period agreed in writing. Payment is due on the agreed date — capped at 45 days from acceptance.
That cap is the part nearly everyone misses. A purchase order stating 90 or 120 days does not create a 90-day credit period. Section 15 says payment may in no case exceed forty-five days, so anything beyond that is unenforceable against you. The clock still starts at day 45, and interest still runs from day 46, whatever the paperwork says.
The rate is punitive on purpose
Section 16 sets the interest at three times the bank rate notified by the Reserve Bank of India, compounded with monthly rests.
At a bank rate of 5.75%, that is 17.25% a year, compounding. For comparison, a reasonably healthy buyer borrows working capital at somewhere around 9–11%. Parliament set the rate deliberately above that: stretching a small supplier is supposed to be the most expensive way to fund a business, not the cheapest.
One technical point worth getting right, because it is the most common error in these calculations: the bank rate is not the repo rate. It is a separate figure the RBI notifies, usually about a quarter point higher. Section 16 refers to the bank rate specifically, so check the current number before you put a figure in a letter.
What it comes to in practice:
| Amount unpaid | How late | Interest owed | Total claimable |
|---|---|---|---|
| ₹1,00,000 | 90 days | ₹4,257 | ₹1,04,257 |
| ₹5,00,000 | 120 days | ₹28,780 | ₹5,28,780 |
| ₹5,00,000 | 1 year | ₹93,015 | ₹5,93,015 |
Computed at 17.25% a year with monthly rests, from the day after payment fell due.
You can work out your own figure — and download a demand letter that cites the sections — with our free MSME delayed payment interest calculator. Nothing you type is sent anywhere.
Why buyers suddenly started caring
The interest provision has existed since 2006 and was widely ignored. What changed the behaviour was a tax rule.
Section 43B(h) of the Income Tax Act, 1961, inserted by the Finance Act 2023, says a buyer cannot deduct a purchase from a micro or small enterprise unless it is paid within the time allowed by section 15. The deduction is not lost — it is deferred to the year the payment is actually made.
Think about what that does to a buyer sitting on your invoice at the end of a financial year. A ₹5,00,000 purchase they have not paid for is ₹5,00,000 they cannot set against income this year. At a 25% effective rate, delaying your payment just cost them ₹1,25,000 in tax they have to fund now and recover later.
A finance team that shrugs at 17.25% interest reacts to that. It is the single most useful sentence in any letter you send, which is why the letter our calculator generates includes it.
What to actually do, in order
1. Send a letter. Most cases end here. Not an email saying "please release payment at the earliest" — a letter that names section 15, states the date payment fell due, names section 16, shows the interest arithmetic, and mentions 43B(h). The point is not aggression; it is demonstrating that you have counted and you know the law. That alone moves a surprising number of files to the top of the pile.
2. Refer it to the Facilitation Council. If the letter is ignored, section 18 lets you refer the dispute to the Micro and Small Enterprises Facilitation Council in your state, filed online through the Government of India MSME Samadhaan portal. There is no filing fee. The Council attempts conciliation first and arbitrates if that fails, and a reference is to be decided within ninety days. A buyer who wants to challenge an award has to deposit 75% of it first — which is a meaningful deterrent to stalling.
3. Check your Udyam registration is current. The benefit of sections 15 and 16 follows your registration as a micro or small enterprise. If it has lapsed or was never completed, fix that before raising a claim. It is the first thing a buyer will check.
The part nobody writes about
Every article on this subject stops at step three, as though the only obstacle were ignorance. It is not. The real reason suppliers do not claim their interest is that they are afraid of losing the customer — and when one buyer is 40% of your revenue, that fear is rational, not timid.
So be honest about which situation you are in.
If the buyer is replaceable, send the letter. A customer who only stays because you finance them at 0% is not a customer; they are borrowing from you on better terms than their bank would offer, and they will keep doing it precisely as long as it is free.
If the buyer is genuinely load-bearing, you have a middle option that most suppliers never consider: send a statement rather than a demand. A short, unemotional note that your account shows ₹X outstanding since a given date, that interest under section 16 has accrued to ₹Y as at today, and that you are not pressing it for now. You have preserved the claim, created the record, and told them you are counting — without issuing an ultimatum. In practice this changes payment behaviour more often than it damages the relationship, because it moves you out of the category of suppliers who can be stretched indefinitely at no cost.
What you should not do is quietly absorb it. Interest you never mention is interest the buyer assumes does not exist, and the delays get longer.
What this does not solve
A calculation is not a claim. The fact buyers dispute most often is not the arithmetic but the date of acceptance — when the goods were actually received and accepted, which is where the clock starts. Keep your delivery challans, signed receipts and acceptance correspondence. That paperwork is what turns a number into something enforceable.
And note the limit of who this protects: sections 15 and 16 apply to suppliers registered as micro or small enterprises. Medium enterprises get the 43B(h) treatment differently and do not get the same benefit.
The better answer, of course, is not having to send the letter. When we send suppliers a buyer requirement, the payment terms are stated up front — so you know what you are agreeing to before you quote, rather than discovering it ninety days later.