Section 7 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 7(1) is the power under which the Central Government classifies enterprises as micro, small or medium. The Act's own text sets out investment limits for manufacturing and services, but those 2006 figures are no longer the working definition: the Central Government has since notified different criteria. This article reads the sub-section as written and then shows where the current definition lives.
Section 7(1) lets the Central Government, by notification, classify any class of enterprises, whether proprietorship, Hindu undivided family, association of persons, co-operative society, partnership firm, company or undertaking. The original text used investment in plant and machinery for manufacturing and investment in equipment for services. Those figures have been replaced by notified criteria. The current limits come from S.O. 2119(E) of 2020 as amended by S.O. 1364(E), effective 1 April 2025.
What the sub-section says
Section 7(1) begins "Notwithstanding anything contained in section 11B of the Industries (Development and Regulation) Act, 1951". It authorises the Central Government, "by notification and having regard to the provisions of sub-sections (4) and (5)", to classify any class or classes of enterprises. Sub-section (4) requires the Government to obtain the Advisory Committee's recommendations before classifying; see our article on the Advisory Committee.
The entities listed are "proprietorship, Hindu undivided family, association of persons, co-operative society, partnership firm, company or undertaking, by whatever name called". Legal form is therefore not a bar to classification.
The 2006 limits in the text of the Act
The original sub-section has two limbs, one for manufacturing and one for services.
| Category | Clause (a): manufacture or production of goods in First Schedule industries (investment in plant and machinery) | Clause (b): providing or rendering services (investment in equipment) |
|---|---|---|
| Micro | does not exceed twenty five lakh rupees | does not exceed ten lakh rupees |
| Small | more than twenty five lakh but not more than five crore rupees | more than ten lakh but not more than two crore rupees |
| Medium | more than five crore but not more than ten crore rupees | more than two crore but not more than five crore rupees |
Please treat these as historic figures. They are the numbers in the Act as enacted, and they are shown here to explain the structure, not to tell you whether your business is micro, small or medium today.
The two Explanations
Explanation 1 clarifies that in calculating investment in plant and machinery, "the cost of pollution control, research and development, industrial safety devices and such other items as may be specified, by notification, shall be excluded". The Udyam notification repeats this exclusion: paragraph 4(5) of S.O. 2119(E) says the cost of the items specified in Explanation 1 to section 7(1) is excluded from the calculation. Our article on calculating investment in plant and machinery covers that.
Explanation 2 says that section 29B of the Industries (Development and Regulation) Act, 1951 applies to the enterprises in sub-clauses (i) and (ii) of clause (a), that is, micro and small manufacturing enterprises. The text of section 29B is not in our source, so read it in that Act if the point matters to you.
Why the figures changed without changing the Act
Sub-section (9) of section 7 lets the Central Government, while classifying under sub-section (1), "vary, from time to time, the criterion of investment" and also consider criteria in respect of employment or turnover. The Government used that power and, by S.O. 2119(E) dated 26 June 2020 (effective 1 July 2020), moved to a composite test of investment in plant and machinery or equipment and turnover. S.O. 1364(E) dated 21 March 2025 then raised the limits, with effect from 1 April 2025. The power is explained in our article on section 7(9).
The 2020 notification supersedes four earlier notifications, including S.O. 1722(E) dated 5 October 2006. It also removes the separate treatment of manufacturing and services in the classification paragraph: paragraph 1 of S.O. 2119(E) applies one set of tests to "an enterprise".
The current definition in brief
From 1 April 2025, as substituted by S.O. 1364(E), an enterprise is:
| Category | Investment in plant and machinery or equipment | Turnover |
|---|---|---|
| Micro | does not exceed Rs 2.5 crore | does not exceed Rs 10 crore |
| Small | does not exceed Rs 25 crore | does not exceed Rs 100 crore |
| Medium | does not exceed Rs 125 crore | does not exceed Rs 500 crore |
Both tests apply together. Crossing the ceiling on either investment or turnover moves the enterprise to the next category (paragraph 3(2) of S.O. 2119(E)). We explain the method in composite criteria of investment and turnover and the revised limits in S.O. 1364(E) of 2025. If you need to register as an MSME on this classification, our MSME Udyam registration service can help.
Why classification matters
Sections 2(g), (h) and (m) define medium, micro and small enterprises by reference to section 7(1). Whether an enterprise is "micro" or "small" decides if it can be a "supplier" under section 2(n) and claim the protections of the delayed payment chapter. Medium enterprises are not within section 2(n). Our article on section 2 definitions sets that out.
Practical examples
Example 1: reading the Act alone. A reader sees "twenty five lakh rupees" in section 7(1)(a)(i) and concludes a manufacturer with Rs 1 crore of plant is small. That is wrong today. The working test is the notified composite criteria, so the same manufacturer would have to be tested against the current limits for both investment and turnover.
Example 2: services. A consultancy firm with low investment in equipment but high turnover is tested on both criteria. Under paragraph 3(2) of S.O. 2119(E), crossing the turnover ceiling of its present category pushes it up to the next one even if its investment stays low.
Common mistakes
- Quoting the 2006 figures in section 7(1) as the current classification.
- Looking only at investment. Turnover is also tested under the composite criteria.
- Ignoring the exclusions for pollution control, research and development and industrial safety devices.
- Assuming the Act itself was re-written. The limits changed through notifications.
Need help classifying your enterprise?
If you are unsure whether your business is micro, small or medium under the notified criteria, or need to register or update a classification, our MSME Udyam registration team can check the figures with you and handle the filing.
Key takeaways
- Section 7(1) empowers the Central Government to classify enterprises by notification.
- The Act's original investment limits (manufacturing: Rs 25 lakh, Rs 5 crore, Rs 10 crore; services: Rs 10 lakh, Rs 2 crore, Rs 5 crore) are historic.
- Explanation 1 excludes the cost of pollution control, research and development and industrial safety devices.
- The current definition is the composite investment and turnover test in S.O. 2119(E), as amended by S.O. 1364(E) from 1 April 2025.
- Classification decides whether an enterprise can qualify as a "supplier" for delayed payment claims.
Read next
- MSME Classification Under S.O. 1364(E) and Udyam Registration
- MSME Classification: Micro, Small, Medium Criteria
- Section 7 of the MSMED Act, 2006: Advisory Committee
- Section 7 of the MSMED Act, 2006: Power to vary classification criteria
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.