Late Payment Penalty Calculator
See what it really costs your business to pay a supplier late. Add the contract penalty, and if the supplier is a micro or small enterprise in India, the MSMED Act interest and the tax you lose on top.
Leave the cap blank or 0 if your contract has no ceiling.
The MSMED Act caps credit at 45 days from acceptance, so the MSMED due date uses 45 days.
Bank rate 5.75% as shown on rbi.org.in in November 2026; check it before you rely on the figure. 25.17% is the new-regime company rate with surcharge and cess.
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How to calculate a late payment penalty
Start with the days late, from the day after the due date to the day you pay. Apply the penalty in your contract. If the supplier is a micro or small enterprise, also work out the MSMED Act interest, because the supplier can claim it whatever the contract says. Then add the costs that never show up on the supplier's invoice: the tax deduction you lose and any discount you gave up.
The higher of your contract penalty and the MSMED Act interest, so nothing is counted twice. Take the contract terms from the purchase order or supplier agreement.
Example: higher of ₹30,918 and ₹43,059 = ₹43,059Section 23 of the MSMED Act stops you deducting this interest, so you pay tax on it. Use your effective tax rate from the tax computation.
Example: ₹43,059 × 25.17% = ₹10,838The early payment discount on the invoice or in the supplier terms that you did not take. Check the payment terms line, such as 2/10 net 45.
Example: 2% of ₹10,00,000 = ₹20,000| Invoice amount | ₹10,00,000 |
| Accepted on / credit agreed | 1 Jun 2026 / 45 days |
| Due date / paid on | 16 Jul / 15 Oct 2026 |
| Contract: ₹1,000 flat + 1% a month | ₹30,918 |
| MSMED interest at 17.25%, monthly rests | ₹43,059 |
| Tax lost (s.23) + discount lost | ₹10,838 + ₹20,000 |
| Total cost of paying late | ₹73,897 |
- Days late: 16 Jul to 15 Oct 2026 = 91 days
- Contract penalty: 10,00,000 × 1% × 12 × 91 ÷ 365 = ₹29,918, plus the ₹1,000 flat fee = ₹30,918 (under the 10% cap)
- MSMED interest: 3 × 5.75% = 17.25% a year, compounded monthly for 2 months, then 29 days at the daily rate = ₹43,059
- Late charge is the higher figure, ₹43,059. Tax lost: 43,059 × 25.17% = ₹10,838
- Discount lost: 2% of ₹10,00,000 = ₹20,000. Total ₹73,897, or 7.4% of the invoice for three months of credit
Late payment rules for buyers in India
If you buy from micro and small enterprises, the law sets the payment deadline and the penalty, not your contract. These are the rules your AP team should know.
| Rule | What it says | What it costs you |
|---|---|---|
| MSMED Act section 15 | Pay within 45 days | Pay by the agreed date, which cannot be more than 45 days from acceptance. With no written agreement you have 15 days |
| MSMED Act section 16 | 3x bank rate, monthly rests | Compound interest from the day after the due date, even if your contract says otherwise |
| MSMED Act section 23 | Interest not deductible | You cannot claim the interest as an expense, so it costs you the interest plus tax on it |
| Income-tax section 43B(h) | Unpaid MSE dues disallowed | If an MSE invoice is still unpaid at year end and past the section 15 limit, the expense is added back to income that year. You get the deduction only in the year you pay |
| MSME Form 1 (MCA) | Half-yearly return | Companies must report MSE dues outstanding for more than 45 days and the reason for the delay |
| Contract terms | Agreed penalty | For medium enterprises, traders and non-MSME suppliers, only what the contract or accepted invoice says applies |
Based on the MSMED Act, 2006, section 43B(h) of the Income-tax Act, 1961 (from tax year 2023-24, carried into the Income-tax Act, 2025) and the RBI bank rate on rbi.org.in. Section 43B(h) covers micro and small manufacturers and service providers, not traders. This is general information, not tax or legal advice.
Get a one-page summary of the penalty, MSMED interest, tax impact and discount lost.
How to stop paying late payment penalties
Most late payments are not a cash problem. They are an invoice stuck in approval, a missing GRN or a supplier nobody flagged as MSE.
Collect the Udyam certificate at onboarding and store the category. You cannot prioritise invoices you have not tagged.
The 45 days run from acceptance, not from when the invoice reaches AP. Post the GRN or service acceptance on time.
Teams using procure-to-pay automation can sort every payment run by statutory due date, so MSE invoices go out before the 45-day mark.
In March, list MSE invoices that will cross the limit before 31 March. Paying them before year end protects the deduction.
A 2% discount for paying 35 days early is worth about 21% a year. If you borrow below that, paying early is cheaper.
A disputed invoice still accrues MSMED interest if the supplier wins. Log disputes with dates and resolve them fast.
On the other side of the table? If you are the supplier, use our late payment interest calculator to work out what you can charge a customer.
Frequently asked questions
Count the days from the day after the due date to the payment date. Add any flat fee, then apply the monthly penalty rate: amount times monthly rate times 12 times days divided by 365 for simple penalty. Cap the result if your contract has a ceiling.
Under section 16 of the MSMED Act, the buyer pays compound interest with monthly rests at three times the RBI bank rate. At a 5.75% bank rate that is 17.25% a year. It applies to micro and small enterprises, from the day after the agreed date or the 45-day limit, whichever is earlier.
No. Section 23 of the MSMED Act says this interest is not allowed as a deduction when computing income. So every rupee of MSMED interest also costs you tax at your effective rate.
Section 43B(h) allows a deduction for amounts owed to micro and small enterprises only when paid, unless you pay within the section 15 time limit. If an invoice is unpaid at year end and past the limit, the expense is added back for that year and allowed in the year you pay.
Section 16 applies notwithstanding any agreement, so an MSE supplier can claim at least the statutory interest. Claiming both on the same delay is usually contested. This calculator uses the higher of the two as the late charge, which is the prudent figure to provide for.
Giving up 2% to keep the cash for 20 more days works out to about 37% a year. Unless your cost of funds is higher than that, taking the discount is the cheaper option.
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