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The MSME 45 Days Payment Rule, effective from April 1, 2024, mandates that buyers must pay micro and small enterprises (MSMEs) within 45 days if any written agreement exists, and within 15 days if there is no written agreement. The Government of India introduced this new MSME payment rule under Section 43B(h) of the Income Tax Act to solve the problem of delayed payments faced by micro and small businesses.
What is the New MSME 45 Days Payment Rule?
In the annual budget for FY 2024-25, the Government of India introduced Section 43B(h) of the Income Tax Act. This new clause that laid the foundation for the new MSME 45-day payment rule. Under this rule, businesses must clear any payment due to MSMEs within 45 days to avail of tax deduction in the same financial year. If they make the payment after the 45 days’ time limit, they can only avail of tax deduction in the financial year during which the money was actually paid. This time limit is specified in Section 15 of the MSMED Act, 2006.
Given below is an illustrative example that explains how this rule works.
On January 10, 2026, XYZ Inc. purchases goods from a registered MSME vendor for ₹15 lakhs, and signs a written agreement with the MSME to pay for the purchase within 45 days i.e. by February 24, 2026.
| Payment Status | Tax Deduction Status | |
| Payment on Time | XYZ Inc. pays the vendor by February 24, 2026 (within 45 days). | The company can claim ₹15 lakhs as tax deduction in FY 2025-26. |
| Payment is Delayed | XYZ Inc. pays the vendor on June 1, 2026 (beyond the 45-day limit). | Tax deduction will be denied for FY 2025–26; they can only claim ₹15 lakhs as a tax deduction in FY 2026-27. |
Section 43B(h) At a Glance
Given below is a summary of Section 43B(h) of the Income Tax Act:
- Effective from: Section 43B(h) is effective from April 1, 2024.
- Objective: To ensure timely payments to micro and small enterprises.
- Applicability: It applies to Micro and Small Enterprises (MSMEs) registered under the MSMED Act, 2006.
- Tax Implications: Tax deductions can only be availed when payment is made within the given deadlines and within the time limits specified.
- Payment deadlines
- 15 days – when no written agreement exists
- 45 days – when written agreement exists
Also read: MSME Registration Online: Eligibility, Process, Documents & Certificate Download Guide (2026)
Why Was the MSME 45 Days Payment Rule Introduced?
The Government of India introduced the MSME 45 days payment rule to address the issue of delayed payments faced by micro and small enterprises. These payment issues slowed down their growth as they did not have access to working capital needed to run their businesses. By implementing strict deadlines for payments, the government aims to ensure that small businesses receive their dues on time. Getting paid on time helps these small businesses improve their operational cash flow and liquidity.
Before the introduction of this rule, large enterprises often used to delay vendor payments indefinitely. Due to market dominance of these large enterprises, the small businesses simply had to wait and borrow additional money to fund their operations. Section 43B(h) now penalises large enterprises that indulge in such activities and delay paying their vendors.
MSME 45 Days Payment Rule Applicability
This rule applies only to businesses making payments to vendors categorized as Micro or Small Enterprises that are registered under the MSMED Act, 2006. It is important to note that Medium Enterprises are specifically excluded from the scope of this provision. The rule mandates that buyers must verify the Udyam registration status of their suppliers to determine if the 15 or 45-day payment rule is applicable. If a supplier is not registered under the MSMED Act, or if they are categorized as a Medium Enterprise, the payment and tax deduction restrictions under this act are not applicable to them. It is also not applicable to wholesale and retail traders.
Are there any Penalties Under Section 43B(h)?
Businesses that fail to pay the vendor within the 45 days’ time limit will incur penalties in the form of:
- Interest Penalty – Businesses will need to pay an interest penalty (compound interest) at three times the bank rate notified by the Reserve Bank of India (RBI). This interest will be calculated from the day immediately following the expiry of the 15 or 45-day period, as per the agreement.
- No Tax Deduction on Interest – Businesses will not be able to claim this interest payment as a deduction under the Income Tax Act, 1961.
Also, the principal amount paid for the purchases made from the vendor cannot be claimed as a tax deduction in the current financial year, and can only be claimed in the financial year in which the payment is actually made.
How is the 45-day deadline calculated?
The deadline is calculated based on the day on which you receive the goods or services from the vendor. If no written agreement exists, you must pay the vendor within 15 days of receiving the goods or services. However, if a written agreement exists, you must make the payment within the date specified in the agreement or within 45 days of receiving the goods or services, whichever is earlier.
Example: Let’s assume that as a business owner, you accept delivery of goods on February 10, 2026.
| Scenarios | Deadline | |
| Scenario A | No Agreement | As there is no agreement, you must pay the vendor by February 25, 2026 (which is 15 days from February 10) |
| Scenario B | Agreement Exists (Specifies payment to be made within 30 days) | In this scenario, you must pay the vendor by March 12, 2026 (within 30 days of February 10) |
Please note that in Scenario B, even if the agreement specified a 60-day payment period, or any period more than 45 days, you would still need to make the payment by March 27, 2026 i.e. within 45 days of delivery of goods as per the new rule.
How does this new payment rule impact your business?
As a business owner, you must verify the Udyam registration status of all the vendors from whom you make purchases to determine if the 45 days payment rule is applicable. If the rule is applicable, you should be proactive in paying your vendors within the given timelines. This will help you to avoid paying any penalties and maintain a good working relationship with the vendors.
Given below are a few tips that will help your business to comply with this new payment rule:
- Maintain an updated vendor database: You should maintain an updated database of the vendors, stating their Udyam registration status, to identify those classified as Micro or Small under the MSMED Act, 2006.
- Review existing vendor contracts: You must review all existing vendor contracts and check if payment agreements exist for all vendors so that you can clear all pending payments as per the terms of the agreements, within 15 or 45 days.
- Automate vendor payments: Use digital payment methods to schedule and automate payments within the given timelines, to avoid late payments and to ensure a clear audit trail for tax filing.
- Regular Monitoring: Periodically reconcile your accounts payable with your vendor master data to identify any pending payments that might be nearing the 45-day timeline.
Conclusion
Implementing the MSME 45 days payment rule under Section 43B(h) is a great initiative taken by the government of India. It is a positive move for both the MSME vendors, who benefit from timely payments, and also for large enterprises, who benefit from better management of working capital. It ultimately encourages better vendor relationships and more robust financial operations. As a business owner, you can easily comply with this new rule by integrating automated payment workflows and maintaining accurate vendor records.
FAQs
What is the MSME 45 days payment rule?
The MSME 45 days payment rule under Section 43B(h) requires businesses to pay registered Micro and Small Enterprises within 45 days to claim tax deductions in the same financial year.
What is the effective date of the MSME 45 days payment rule?
The MSME 45 days payment rule became effective from April 1, 2024.
Does the 45-day rule apply to all vendors?
No, it applies only to registered Micro and Small Enterprises under the MSMED Act. Medium enterprises and traders, both retail and wholesale, are excluded from this rule.
What happens if the MSME vendor is not registered on Udyam?
If the MSME vendor is not registered on Udyam, the new payment rule and the timelines given under Section 15 of the MSMED Act, 2006, will not apply to them.
As a business owner, can I claim a tax deduction for the interest paid on late payments?
No, interest paid for delayed payments to MSMEs cannot be claimed as tax deductions under the Income Tax Act. Only the main principal amount paid to the vendor can be claimed as tax deductible in the financial year in which the payment is actually made.
Does the 45 days rule apply to payment made by credit cards or a payment app?
Yes, the 45 days rule applies to all modes of payments including credit cards and payment apps. It depends on the type of vendor and whether they are classified as Micro or Small under the MSMED Act, 2006, regardless of the mode of payment used to pay the vendor.
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