We paid an MSME supplier late: what interest do we owe and how do we show it in the accounts?

Your accounts team has a list of supplier invoices that went past their due date. Some are paid, some are still open. A few of those suppliers are small businesses with a Udyam registration. Now the auditor is asking two questions. How much interest does the company owe on the delay? And where does that show up in the financial statements?

This article answers both for the buyer company. It is about the interest and its disclosure. The 45-day payment clock, the income-tax deduction rule for unpaid MSME dues and the supplier's recovery route are covered in separate articles on this site.

Who is protected, and who owes the interest

The interest rule sits in the Micro, Small and Medium Enterprises Development Act, 2006 ("MSMED Act"). It applies when a "buyer" fails to pay a "supplier" as required by section 15. A buyer is "whoever buys any goods or receives any services from a supplier for consideration" (s.2(d), MSMED Act, 2006). Your company is a buyer the moment it purchases from a micro or small enterprise.

The supplier must be a micro or small enterprise for this to apply. The Schedule III disclosure text (below) says the terms "buyer", "micro enterprise", "small enterprise" and "supplier" carry the meaning given in section 2 of the MSMED Act. So the first practical job is to know which of your suppliers are micro or small enterprises. Do not guess from size. Ask for the supplier's Udyam registration details and keep a copy on the vendor file.

Recap: when the interest starts and at what rate

This site has separate articles on the 45-day clock and on the supplier's recovery route, so only a short recap is given here. Section 15 requires payment "on or before the date agreed upon between him and the supplier in writing or, where there is no agreement in this behalf, before the appointed day". An agreed period can "in no case" exceed forty-five days from the day of acceptance or deemed acceptance (s.15, MSMED Act, 2006). The "appointed day" is the day following immediately after the expiry of fifteen days from the day of acceptance or deemed acceptance (s.2(b), MSMED Act, 2006).

On a miss, section 16 makes the buyer liable to pay "compound interest with monthly rests to the supplier on that amount from the appointed day or, as the case may be, from the date immediately following the date agreed upon, at three times of the bank rate notified by the Reserve Bank", and it applies "notwithstanding anything contained in any agreement between the buyer and the supplier or in any law for the time being in force" (s.16, MSMED Act, 2006). So a "no interest" clause in your terms does not displace it. Section 17 repeats that the buyer is liable for the amount "with interest thereon as provided under section 16", and section 24 gives sections 15 to 23 overriding effect over inconsistent law.

The Act fixes no percentage. The bank rate changes, and this article does not quote it. Check the figure notified by the Reserve Bank of India for the months of delay before you compute.

A worked example (illustrative rate)

The Act sets no month-by-month formula. The Act does not spell out the arithmetic. A common working method (a reading, not statute) is to take one-twelfth of the annual rate for each month and compound it. The rate below is assumed purely for the arithmetic. It is not the current bank rate.

Assume the notified bank rate is 6%. Three times that is 18% a year, or 1.5% a month.

For Supplier A: ₹10,00,000 grows to about ₹10,45,678 over three monthly rests, so the interest is ₹45,678 (₹45,678.38 before rounding). For Supplier B: ₹5,00,000 grows to about ₹5,15,113 over two rests, so the interest is ₹15,113 (₹15,112.50 rounded up).

Your own numbers depend on your actual due dates and the notified bank rate.

Where it goes in the accounts: section 22

Section 22 is titled "Requirement to specify unpaid amount with interest in the annual statement of accounts". Where a buyer "is required to get his annual accounts audited under any law for the time being in force", the buyer must furnish additional information in the annual statement of accounts (s.22, MSMED Act, 2006). The five items are:

• The principal amount and the interest due on it, shown separately, remaining unpaid to any supplier at the end of each accounting year.
• The amount of interest paid in terms of section 16, along with the payments made to the supplier beyond the appointed day during the year.
• The interest due and payable for the period of delay on payments that were made, but beyond the appointed day, during the year, without adding the interest under the Act.
• The interest accrued and remaining unpaid at the end of each accounting year.
• The further interest remaining due and payable even in the succeeding years, until the dues are actually paid to the small enterprise, for the purpose of disallowance as a deductible expenditure under section 23.

If your accounts are audited under any law, these items are not optional notes.

The same list sits in Schedule III

For companies, the Companies Act, 2013 repeats the list in Schedule III. Under the heading "Trade Payables" in the balance sheet notes, "the following details relating to Micro, Small and Medium Enterprises shall be disclosed in the notes", followed by the same five items (Schedule III, Division I, Companies Act, 2013). Division II, for companies whose accounts follow the Ind AS Rules, carries the same text under trade payables. Division III, for a non-banking financial company whose accounts follow the Ind AS Rules, carries it under "Payables" (Schedule III, Divisions II and III, Companies Act, 2013).

Which Division applies depends on your reporting framework. The five lines are the same.

Filling the five lines using the example

The five lines in Schedule III are the same as the five items in section 22. What follows is a reading of how the example above may map to those lines at 31 March. It is a reading to discuss with your auditor, not statute, and your auditor may place an item differently.

• Line 1 (unpaid principal and interest, separately). Supplier A: principal ₹10,00,000 and interest due ₹45,678, shown as two figures, not one total.
• Line 2 (interest paid, and payments made beyond the appointed day). Supplier B's ₹5,00,000 was paid late. Report that payment. If you had also paid the interest on it, that interest amount goes here. In the example you did not, so the interest paid is nil.
• Line 3 (interest due for the delay on late payments made). Supplier B's ₹15,113 is interest for the period of delay on a payment that was made, but beyond the appointed day. It goes here, and the text says to show it "without adding the interest specified under" the Act, so do not pile further interest on it.
• Line 4 (interest accrued and remaining unpaid at year end). Supplier B's ₹15,113 is accrued and unpaid. Supplier A's ₹45,678 is accrued and unpaid too, so the line carries both.
• Line 5 (further interest still to run). Supplier A's invoice remains open, so interest keeps accruing after the year end until you pay. Disclose that the amount continues to be due.

Interest is not deductible: section 23

Section 23 says that "notwithstanding anything contained in the Income-tax Act, 1961", the interest "payable or paid by any buyer, under or in accordance with the provisions of this Act, shall not, for the purposes of computation of income under the Income-tax Act, 1961, be allowed as deduction" (s.23, MSMED Act, 2006).

• When you book the interest in the profit and loss account, add it back in your tax computation. It is an expense in the books but not allowed against income.
• That is why line 5 of the disclosure exists. It asks for the further interest still to run, "for the purpose of disallowance as a deductible expenditure under section 23". The auditor and the tax team both need that figure.

The Income-tax Act, 2025 applies from tax year 2026-27. Section 23 of the MSMED Act, as quoted above, still refers to the 1961 Act by name. Ask your tax adviser how that cross-reference is read for the computation you are preparing. Do not assume it away.

What to do, step by step

• List your micro and small suppliers. Get the Udyam details. Mark each invoice with its date of acceptance.
• Fix the due date and compute interest for every late invoice, paid or unpaid. Method as in the recap above.
• Decide what you will pay. Interest is a legal liability. If you do not pay it, it stays accrued and keeps showing in the disclosure.
• Prepare the five-line note. Draft it for the audit.
• Add back the interest in the tax computation.
• Keep the evidence. Delivery proof, written objections, the payment agreement and payment dates.

What not to do

• Do not rely on a "no interest" clause in your purchase terms. Section 16 overrides it.
• Do not net the interest into the principal in the note. The text says to show them separately.
• Do not skip the note because the amounts are small or the supplier has not asked. Section 22 is a duty of the buyer, not a response to a claim.
• Do not treat the interest as an allowable expense in your tax computation.

What to do now

• Next step: Build the supplier-wise schedule of due dates and payment dates for the full year and compute the interest. Source: s.15 and s.16, MSMED Act, 2006.
• Deadline: The disclosure belongs in the annual accounts before the audit is signed off. If the interest is unpaid, it carries forward and keeps accruing. Source: s.22, MSMED Act, 2006; Schedule III, Companies Act, 2013.
• Consequence of skipping it: The accounts would lack information the Act requires for an audited buyer, the interest keeps running at compound rates, and the tax computation would wrongly deduct it. Source: s.16, s.22 and s.23, MSMED Act, 2006.

Have a CA review your facts before you act or file.

FAQs

Does the interest apply if we paid the invoice in full, just late?
Yes. Section 16 makes the buyer liable for interest where it fails to pay as required by section 15. The liability does not disappear because the principal was later paid. That is why line 3 of the disclosure covers payments that were made, but beyond the appointed day.

Our contract says thirty days with interest at 12% on delay. Which applies?
The agreed period is valid up to forty-five days. But the interest rate in section 16 applies "notwithstanding anything contained in any agreement" (s.16, MSMED Act, 2006). A lower contractual rate does not replace it.

We are a small company with audited accounts. Do we still make the note?
Section 22 applies to a buyer "required to get his annual accounts audited under any law for the time being in force". If your accounts are audited under any law, the note applies. If they are not, it does not by that section. Confirm your position with your auditor.

Where do I find the current bank rate?
It is the rate notified by the Reserve Bank. It is not in the Act and not in this article. Check the Reserve Bank of India's notified figure for the months of delay.

Does this also cover medium enterprises?
The disclosure text refers to the "small enterprise" and the definitions of micro and small enterprise. Check the supplier's category on its Udyam registration. Do not apply the rule to a supplier you have not classified.

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See Also

• Finance Act 2026: changes that touch a private company's directors
• Do we still collect 0.1% TCS on sales above ₹50 lakh?
• Section 118: minutes — the 30-day rule and what can be left out