The 45-Day MSME Payment Rule: The Deduction You Lose by Paying Late

Everyone wrote this for the wrong reader

Search for the 45-day rule and you will find page after page explaining how a small supplier can register on Udyam and use the rule to get paid faster. Useful, if you are the supplier.

But the money in this rule does not move to the supplier through the tax system. It moves away from the buyer. Section 43B(h) does not fine you for paying late — it takes away your deduction for the expense in the year you incurred it. And the buyer is almost always the larger business, with the bigger tax bill and the more complicated payables ledger.

This is written for that business.

What the rule actually does

Section 43B lists expenses that are deductible only when actually paid. Clause (h) added sums payable to micro and small enterprises to that list, with a twist: the deduction is available in the year of accrual if you pay within the Section 15 window, and only in the year of payment if you do not.

So the effect is a timing shift, not a permanent loss. Pay a micro supplier ₹40 lakh in June for a March invoice and the ₹40 lakh is deductible in the following year rather than in the year you incurred it. The tax comes back eventually. The cash does not come back this year.

15 days or 45 days: which applies to you

Section 15 of the MSMED Act, 2006 sets the window. The default is 15 days. Forty-five days is available only where there is an agreement in writing, and it is an outer limit — an agreement cannot extend beyond 45 days even if both parties want it to.

The clock runs from the day of acceptance, which is the day the goods were actually delivered or the services actually rendered. It is not the invoice date, and it is not the date the invoice reached your accounts department. Where you object to the goods or services in writing within 15 days of delivery, the clock runs instead from the day your objection is removed.

Two practical consequences. A purchase order that says "payment 90 days" gives you 45, so your ERP payment terms and your legal exposure disagree with each other. And a business that works on emailed quotes rather than signed terms is probably on 15 days across its whole vendor base without realising it.

Which suppliers are inside the rule

Only micro and small enterprises. Medium enterprises are outside Section 43B(h) entirely, which surprises people, because "MSME" is used loosely enough in ordinary speech to suggest all three are in.

Classification has been on the following basis since 1 April 2025, and both tests must be satisfied — investment and turnover.

A supplier moves category as it grows, so a vendor who was micro when you onboarded them in 2023 may be medium now, or the reverse. The classification that matters is the one applicable when the liability arose, which is why this has to live in the vendor master and be refreshed, not be established once and forgotten.

The trader question

This is a genuine ambiguity and you should be wary of any page that resolves it confidently in either direction.

Retail and wholesale traders were permitted to register on Udyam by an Office Memorandum in 2021, but that memorandum states the benefit is for priority sector lending purposes. The definition of "supplier" in the MSMED Act, which is what Section 15 and therefore Section 43B(h) hang on, is not obviously satisfied merely by holding an Udyam registration obtained on that basis.

The practical position: a trading vendor may present an Udyam certificate and assert the 45-day protection. Whether Section 43B(h) is engaged on those facts is not settled, and the answer can move a material number in a large payables ledger. Get advice on your own vendor base rather than adopting a blanket policy either way. Where the amounts are small, paying within 45 days is cheaper than the argument.

Who the rule applies to on your side

• Any assessee computing business or professional income on an accrual basis — companies, LLPs, firms, and individuals with a business.
• Not assessees under the presumptive schemes, because income there is computed on a deemed basis rather than by allowing actual expenditure.
• Not amounts that are capitalised rather than claimed as a deduction — though the interaction with work in progress and with inventory is fact-specific and worth checking.

The interest nobody budgets for

Section 16 of the MSMED Act requires the buyer to pay compound interest, with monthly rests, at three times the bank rate notified by the Reserve Bank, on any amount paid beyond the Section 15 window. It runs automatically — the supplier does not have to have asked for it.

And Section 23 of the same Act denies a deduction for that interest. So it is paid out of taxed income.

A supplier who wants to enforce it goes to the Micro and Small Enterprises Facilitation Council through the MSME Samadhaan portal, which is a low-cost route for them and an expensive one for you. Most do not. But "most do not" is a bad control, and a departing supplier with a grievance is exactly the one who will.

The accounts-payable control that actually prevents this

Everything above is law. This next part is the operational answer, and it is the bit missing from almost every article on the subject. Five controls, in order of how much they save you.

1. Put MSME status in the vendor master

Three fields against every vendor: Udyam registration number, category as micro, small or medium, and the date the certificate was verified. Not a note in a comments box — indexed fields you can filter and report on.

Verify the Udyam number on the Udyam portal rather than accepting a PDF. Certificates get edited.

2. Make it a condition of onboarding

No new vendor is created without an answer to the MSME question, including a positive "not registered" answer with a declaration to that effect. A blank field is the state from which every one of these problems grows.

Collect the written payment terms at the same time. Fifteen days is the default, and the default is expensive.

3. Set the payment clock from the right date

Drive the due date from goods receipt or service completion, not from invoice date and certainly not from invoice entry date. If your system cannot do that, run the ageing off the GRN date in a report even if the payment run works off invoice date.

4. Run a 30-day exception report, not a 45-day one

A report that tells you an MSME invoice has hit 45 days is a report about something that has already happened. Run it at 30 days for the 45-day vendors and at 10 days for the 15-day ones, and give it to whoever can actually release a payment.

5. Do the sweep in February, not in July

Six weeks before the year end, pull every open payable to a micro or small vendor and settle what can be settled. The deduction you protect is worth real money and the exercise takes an afternoon. Doing it during the audit is doing it too late — by then the disallowance is a fact and all that is left is disclosing it. This is one of the things a proper year-end close is for.

If the vendor master is the weak point — and it usually is — monthly bookkeeping can carry the flagging and the exception report as part of the routine rather than as a project.

MSME-1: the return that catches companies out

Separately from the tax position, a company with any amount outstanding to a micro or small enterprise for more than 45 days must file MSME Form 1 with the Registrar of Companies, half-yearly — by 31 October for April to September, and by 30 April for October to March.

It is a small form and it is widely missed, largely because it sits with the company secretarial function while the underlying data sits in accounts payable. Failure to file attracts penal consequences under the Companies Act, and the form itself is a written record of exactly the delays that Section 43B(h) disallows — so the two need to be consistent with each other. Annual compliance for private limited companies covers it.

If you are the supplier

Briefly, because the rest of the internet has this covered. Register on Udyam if you qualify — it is free, it is online, and it takes minutes; see our MSME and Udyam registration guide or the Udyam registration service. Put your Udyam number on every invoice and in your onboarding pack, because a buyer cannot flag you in their system if they do not know. And if you are not being paid, the Facilitation Council route through MSME Samadhaan exists and works.

Key takeaways

• 45 days with a written agreement, 15 without. The ceiling is 45 and an agreement cannot exceed it.
• The clock runs from delivery or completion, not from the invoice date.
• Micro and small only. Medium enterprises are outside the rule.
• Paying before the return due date does not save the deduction — the usual Section 43B proviso does not apply to clause (h).
• Interest under the MSMED Act is compound, at three times the bank rate, and is not deductible.
• The fix is in the vendor master and the exception report, not in the tax computation.

Frequently asked questions