MSME 45-Day Payment Rule 2026: Latest Amendments, Penalties & Compliance Checklist

A manufacturing client came to us this year with a chunk of expenses disallowed in a single tax year -not because a vendor went unpaid, but because payment landed a few days past the deadline. The key point of the MSME 45-day payment rule 2026 is simple: compliance depends on when the payment is made within the statutory payment period , not the buyer’s intent.

What the MSME 45-Day Payment Rule Actually Says (Section 43B(h))

Introduced by the Finance Act 2023 and effective from Assessment Year 2024-25, Section 43B(h) of the Income Tax Act says that any amount payable to a registered Micro or Small Enterprise for goods or services can only be claimed as a tax deduction in the year it's actually paid -if payment is delayed beyond the time limit set under Section 15 of the MSMED Act, 2006. Where a written agreement exists, the agreed payment period cannot exceed 45 days from the date of acceptance or deemed acceptance under the MSMED Act. 

• It applies regardless of whether the buyer follows cash or mercantile accounting

• It applies as long as the supplier is MSME-registered -the buyer's own registration status is irrelevant

• From FY 2026-27, the same payment rule continues under the Income-tax Act, 2025. The section number has changed, but the 45-day payment requirement remains.

Why Even a 60-Day Agreement Doesn't Protect You

This is the single most common mistake we see. Buyers assume that if they've signed a written agreement with a supplier for 60-day credit terms, they're covered. They're not. Section 15 allows parties to agree on a payment period, but the agreed period cannot exceed 45 days.Any contractual credit period beyond 45 days does not override the statutory limit, even if both parties agree to it.

The Real Cost of Getting This Wrong: Penalties & Interest

• Compound interest: Section 16 of the MSMED Act imposes compound interest on the overdue amount at three times the RBI's notified bank rate -a punishing rate once it compounds monthly.

• Deduction pushed to a later year: the expense isn't lost permanently, but it's disallowed in the year it was incurred and only becomes deductible in the year it's actually paid -which increases tax liability now, when cash is already tight.

• Interest itself isn't deductible: Section 23 of the MSMED Act specifically disallows the interest paid under Section 16 as a business expense -it's a pure cost, with no offsetting tax benefit.

2026 Compliance Checklist for the 45-Day Rule

• Verify Udyam registration status of every vendor at onboarding, not after a dispute arises

• Tag MSME-registered vendors clearly in your accounting or ERP system so payment terms are flagged automatically

• Set payment reminders against the 45-day limit, rather than relying only on the credit period mentioned in the purchase agreement.

• Review and reconcile outstanding dues to MSME vendors before March 31 every year, particularly payments approaching the 45-day limit.

• Disclose delayed payments accurately in your tax audit report (Form 3CD), since this is now a specific reporting requirement

Related Reading

Late payments are ultimately a working capital problem as much as a tax one -see our Working Capital Management service for how we help clients plan payment cycles proactively. For the tax mechanics, our Taxation Advisory team tracks MSME compliance as part of every audit cycle. If you're weighing whether to bring in dedicated support for this, see our CFO services cost guide for 2026.

Not sure which of your vendors are MSME-registered, or whether your March 31 reconciliation is clean? Book a free consultation with our team.