Quick answer: The law fixes it for you: 3 times the RBI bank rate, compounded with monthly rests. For example, at an RBI bank rate of 5.50%, that works out to 16.50% per year — and because it compounds every month, the effective cost to the buyer is even higher. Always verify the bank rate on the date of calculation. You don’t need any interest clause in your contract for this to apply.

Where does this interest rate come from?

Section 16 of the MSMED Act, 2006 sets the rate — in plain English, it says a buyer who pays a registered Micro or Small supplier late must pay compound interest at three times the bank rate notified by the Reserve Bank of India. The rate is deliberately penal: it is meant to make delaying a small supplier more expensive than borrowing from a bank.

How much does it actually work out to?

The RBI bank rate changes from time to time, so the applicable rate moves with it. For example, if the RBI bank rate is 5.50%, the penal rate works out to 16.50% per annum, compounded monthly. Always check the current bank rate before putting a figure in a notice, because if the RBI revises the rate during your delay period, the applicable rate changes for the later months too.

A simple worked example

Suppose a buyer owes you ₹10,00,000 and pays 12 months late. Taking an illustrative rate of 16.5% per year compounded monthly (about 1.375% per month), the interest works out to approximately ₹1.78 lakh — nearly 18% of the principal in a single year, because monthly compounding pushes the effective annual cost above the headline 16.5%. Stretch the same delay to three years and the interest crosses ₹6.3 lakh. This is why long-pending MSME dues become so expensive for buyers.

Delay period (on ₹10,00,000)	Approx. interest owed (at ~16.5% p.a., monthly compounding)
6 months	₹ 85,000 (approx.)
12 months	₹ 1,78,000 (approx.)
24 months	₹ 3,88,000 (approx.)
36 months	₹ 6,35,000 (approx.)

Three things that make this interest unusually powerful

First, it applies automatically — even if your contract is silent, or even says something different. The law overrides private agreements on this point. Second, it compounds monthly, so it grows faster than simple interest. Third — and buyers hate this one — under Section 23 of the MSMED Act, the buyer cannot claim this interest as a tax-deductible expense. Every rupee of it is a straight, after-tax loss for them.

How do I use this in practice?

When you send a payment reminder or formal notice, calculate the interest up to date and state the figure clearly, along with a line noting that it continues to grow monthly. A specific number (“₹1,42,300 as of today and increasing”) lands much harder than a vague warning. If the matter goes to the MSME Facilitation Council, the Council can award you the full principal plus this compound interest.

Frequently Asked Questions

Q. Do I need to mention interest on my invoice for it to apply?

A. No. The right comes from the statute itself. Mentioning it on invoices is still a good practice, because it reminds buyers of the cost of delay.

Q. Is this interest taxable in my hands when I receive it?

A. Interest received is generally income in your hands — discuss the treatment with your CA. The special rule (non-deductibility) applies to the buyer’s side, not yours.

Q. Can the buyer negotiate the interest down?

A. You can voluntarily settle for less to close a matter — that is a commercial choice. But the buyer cannot force a lower rate; the statutory rate is the default the Council will apply.

Q. From which exact date does interest start?

A. From the day after the payment deadline (the agreed date, capped at 45 days from acceptance; or 15 days from acceptance if there is no written agreement).

About the author: Advocate Praveen Siinghhal is a Delhi-based lawyer with 25+ years of experience in MSME payment recovery, commercial disputes and business legal protection. He advises MSMEs and business owners on unpaid dues, legal notices, MSME Facilitation Council claims and recovery strategy.

Disclaimer: This article is for general information only and is not legal advice. Laws, RBI bank rate, tax treatment, portal procedures and case law may change from time to time. Please verify the current position or consult a professional before acting on any specific claim.