Bank Rate 5.75% from 7 Oct 2026: statutory interest is now 17.25% a year, compounded monthly. What changed

Buying from MSMEs? Paying late now costs you four ways.

Statutory interest you cannot deduct, a purchase cost you cannot deduct until paid, half-yearly reporting to the Registrar, and disclosures your auditor will check. Here is the compliance picture for finance teams.

Checked 12 Oct 2026 For CFOs, accounts payable and tax teams

The four costs of paying late

1. Interest at 17.25%, compounding

Section 16 interest at three times the Bank Rate with monthly rests, whatever the contract says. Section 23 makes it permanently non-deductible.

2. Deduction deferred

The purchase or expense itself is deductible only in the year of actual payment if it is paid beyond the Section 15 limit.

3. Reporting

Companies report MSE dues outstanding beyond 45 days to the Registrar every half-year in MSME Form I.

4. Litigation on the supplier's terms

A reference in the supplier's home state, an award you can challenge only after depositing 75%, and recovery as arrears of land revenue under the 2026 amendment.

Which vendors count

The rules bite only for suppliers that are micro or small enterprises as defined in the MSMED Act, in manufacturing or services. Medium enterprises are outside them. Retail and wholesale traders on Udyam get priority-sector lending benefits only, so purchases from them are generally treated as outside these provisions. Build the vendor master on facts:

  • Collect the Udyam certificate, and the Udyam Assist certificate for informal micro units, at onboarding. Refresh it every year, because categories change with turnover.
  • Record the category and its effective date, the NIC activity, and the registered address. The address decides which Council a dispute goes to.
  • Flag vendors whose purchase orders give more than 45 days of credit. For micro and small vendors those terms are read down to 45.

Tax: Section 43B(h), now Section 37(2)(g)

From financial year 2023-24, Section 43B(h) of the Income-tax Act, 1961 allows any sum payable to a micro or small enterprise beyond the time limit in Section 15 of the MSMED Act only in the year it is actually paid. The Income-tax Act, 2025, in force from 1 April 2026, carries the rule forward in Section 37(2)(g). Unlike most of Section 43B, payment before the return due date does not save the deduction.

Year-end exampleGoods accepted on 1 March under a 30-day written term are due on 31 March. If payment slips to 5 April, the cost is deductible only in the next year, and Section 16 interest for the delay is never deductible.

The tax audit report asks for the Section 23 interest and the amounts disallowed. Keep a register of MSE dues with acceptance dates, due dates and payment dates. Without it, the disallowance cannot be computed.

MSME Form I

Companies whose dues to micro or small suppliers remain unpaid beyond 45 days from acceptance file a half-yearly return in MSME Form I on the MCA portal, giving amounts and the reasons for delay. Due dates are 31 October for April to September and 30 April for October to March. Penalties for non-filing arise under the Companies Act. Check the current form version on the MCA portal, as MCA has revised the format.

Disclosures in the accounts

Under Section 22, every buyer whose accounts are audited must disclose: principal and interest unpaid at year-end, shown separately; interest paid under Section 16 and late payments made during the year; interest due for delayed payments made during the year; interest accrued and unpaid at year-end; and further interest remaining due into later years, for the Section 23 disallowance. Company financial statements under Schedule III also break down trade payables to MSMEs.

Two practical consequences. These disclosures are visible to suppliers and lenders. And the Supreme Court has said in Sonali Power that such an entry may amount to an acknowledgment of debt, which can extend limitation for the supplier's claim.

TReDS obligations

  • Since the November 2024 notification, companies with turnover above ₹250 crore and all central PSUs must be onboarded on a TReDS platform.
  • Under the 2026 amendment, once notified, every central PSU must route settlement of MSME invoices through TReDS (new Section 15A) and disclose those invoices (new Section 22A). The Centre and the States may extend this to other entities.

Penalties from 2026

The 2026 amendment replaces the old criminal fine for breaching Section 22 with a graded civil scheme: a warning for the first contravention, a penalty of ₹10,000 to ₹50,000 for the second, and ₹50,000 to ₹1 lakh for the third and later ones. Minimums rise by 10% every three years. The Development Commissioner (MSME) adjudicates, with appeal to the MSME Secretary. These provisions apply from the date the Centre notifies.

How I can help buyers

Vendor MSME status review

Udyam and UAP verification, category and date tracking, traders flagged, address mapping.

Payables ageing on the 45-day clock

Acceptance-based ageing instead of invoice-based ageing, with exceptions for credit terms over 45 days.

Interest and tax workings

Section 16 interest provisioning, Section 23 add-backs, and 43B(h) or 37(2)(g) disallowance schedules for the tax audit.

Form MSME I and disclosures

Half-yearly return data, Section 22 and Schedule III disclosures that reconcile with the vendor ledger.

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