Section 16 explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Section 16 is the interest clause of the delayed payment chapter. If a buyer does not pay as section 15 requires, the buyer is liable to pay compound interest with monthly rests, at three times the bank rate notified by the Reserve Bank, from the appointed day or from the day after the agreed date. It applies "notwithstanding anything contained in any agreement" or any other law, so a contract cannot bargain it away.
A buyer who fails to pay "as required under section 15" is liable to pay compound interest with monthly rests at three times the bank rate notified by the Reserve Bank. Interest runs from the appointed day or, where there is a written agreement, from the date immediately following the date agreed. The liability holds notwithstanding any agreement or any law for the time being in force. The Act does not state a bank rate figure; look it up for the relevant period.
The text of section 16, element by element
| Element | Text |
|---|---|
| Trigger | The buyer "fails to make payment of the amount to the supplier, as required under section 15" |
| Override | "notwithstanding anything contained in any agreement between the buyer and the supplier or in any law for the time being in force" |
| Liability | "compound interest with monthly rests to the supplier on that amount" |
| Start date | "from the appointed day or, as the case may be, from the date immediately following the date agreed upon" |
| Rate | "at three times of the bank rate notified by the Reserve Bank" |
Trigger: a breach of section 15
Interest is owed only when the buyer has failed to pay "as required under section 15". That means either the written agreed date (never beyond forty-five days from acceptance or deemed acceptance) or, without an agreement, the appointed day. See section 15. If a contract says ninety days but the proviso caps the agreed period at forty-five, the statutory date is the one against which default is measured; the Act's own text for that point is limited to the proviso's words.
The override clause
The words "notwithstanding anything contained in any agreement ... or in any law for the time being in force" matter in two ways. A contract clause that waives interest, or fixes a lower rate, does not cut down the statutory liability in the wording of the section. A law that provides a different interest regime does not displace it either, in terms of this section. Section 24 adds a general overriding effect for sections 15 to 23; see sections 23 and 24.
Compound interest with monthly rests
The interest is compound and the rests are monthly. In plain terms, at the end of each month the interest accrued is added to the principal, and the next month's interest is worked out on the larger sum. The Act does not give a formula or an example, so a computation should state its assumptions: the start date, the month-end convention and the rate applied in each period.
Three times the bank rate
The rate is "three times of the bank rate notified by the Reserve Bank". The Act does not say what that figure is, and this article does not state one. The bank rate is notified by the Reserve Bank and can change, so a computation has to use the bank rate as notified for the relevant period. Do not use an old figure from a previous article or circular without confirming the rate for the dates in question. If you need a dated computation for a claim or an audit note, our MSME interest computation service can prepare one.
From when does interest run?
| Situation | Interest starts |
|---|---|
| No written agreement | From the appointed day (section 2(b)) |
| Written agreement | From the date immediately following the date agreed upon |
The text says "the appointed day or, as the case may be, ... the date immediately following the date agreed upon". For the appointed day see our section 2(b) article.
What it does not say
- It does not state the bank rate or the resulting percentage.
- It does not say whether an agreed date beyond forty-five days is measured from the day after the agreed date or from day forty-five. The Act's text does not spell this out; take advice on the position in a particular claim.
- It does not say anything about interest on interest beyond the compounding at monthly rests.
- It does not say how or where the claim is enforced; section 17 makes the buyer liable and section 18 gives the reference route.
- It does not address the buyer's tax deduction; section 23 denies a deduction for this interest under the Income-tax Act, 1961.
Buyer's side: books and disclosures
A buyer with audited accounts has to disclose amounts unpaid and interest under section 22, as covered in our post on section 22 disclosures. Interest under section 16 is not an optional item in those disclosures.
Practical examples
Example 1: no written agreement, structure only. A small supplier's invoice is for Rs 10,00,000. Goods delivered on 1 March, no written objection. The appointed day follows fifteen days after delivery. From that day, interest accrues at three times the notified bank rate with monthly rests. At each month end the interest is added to the amount on which the next month's interest is worked out. To get a rupee figure you need the bank rate in force for each period.
Example 2: written agreed date. The purchase order says payment by 20 April. The buyer pays on 10 June. Interest runs from 21 April, the day immediately following the agreed date, until payment.
Example 3: a waiver clause. The contract says "no interest on delayed payment". Section 16 applies "notwithstanding anything contained in any agreement", so the clause does not cut down the statutory liability in the wording of the section.
Example 4: part payment. The buyer pays half on the due date. Interest under the section is on "that amount", meaning the unpaid amount, from the start date. How part payments are appropriated is not stated in the Act.
Common mistakes
- Using simple interest instead of monthly compounding.
- Using a fixed percentage copied from an old article instead of three times the bank rate notified for the period.
- Starting interest from the invoice date.
- Forgetting that the buyer cannot claim a deduction for this interest under the Income-tax Act, 1961 (section 23).
Need help working out the interest on an MSME invoice?
Interest under section 16 depends on the right start date, the notified bank rate for each period and monthly compounding. If you need a statement you can put in front of a buyer, an auditor or a Facilitation Council, our MSME interest computation team can prepare it from your records.
Key takeaways
- Liability arises when the buyer fails to pay as section 15 requires.
- Interest is compound with monthly rests at three times the bank rate notified by the Reserve Bank.
- It runs from the appointed day or the day after the written agreed date.
- The clause overrides any contrary agreement or law in its wording.
- The Act states no bank-rate figure; use the notified rate for each period.
Read next
- Section 15 of the MSMED Act, 2006: Liability of buyer to make payment
- Section 17 of the MSMED Act, 2006: Recovery of amount due with interest
- Interest on Delayed Payments to MSMEs: Act 1993 and MSMED Act 2006 Guide
- MSME Payment Protection: the 45 Day Rule, Sections 15 to 24
Disclaimer: Based on the Micro, Small and Medium Enterprises Development Act, 2006 (official text, not amended by the Jan Vishwas Acts of 2023 or 2026) and the Udyam notifications S.O. 2119(E) of 26 June 2020 and S.O. 1364(E) of 21 March 2025, read with later developments noted in the article, as on 30 September 2026. Notifications, rules and the Udyam portal change; verify the current position before acting.