Compound interest with monthly rests means interest is calculated each month on the outstanding balance and then added to it, so that unpaid interest earns interest from the following month. The formula is Amount = Principal × (1 + r/12)^n, where r is the annual rate and n the number of months. Section 16 of the MSMED Act, 2006 applies it at three times the RBI bank rate to delayed payments, which makes the effective annual cost higher than the nominal rate.
How monthly compounding works in India
Take the annual rate, divide by 12 for the monthly rate, and apply it to the running balance each month. For Section 16, the annual rate is three times the bank rate for each month, so if the bank rate changes mid-period the computation is done in segments. Facilitation Councils expect a month-by-month table showing the opening balance, the rate, the interest for the month and the closing balance. The table starts the day after the Section 15 due date and ends on the payment date or the date of the claim.
| Month | Opening balance (₹) | Interest at 1.625% (₹) | Closing balance (₹) |
|---|---|---|---|
| 1 | 10,00,000 | 16,250 | 10,16,250 |
| 2 | 10,16,250 | 16,514 | 10,32,764 |
| 3 | 10,32,764 | 16,782 | 10,49,546 |
| 6 | … | … | 11,01,550 (approx.) |
| 12 | … | … | 12,13,400 (approx.) |
Why it matters for getting paid
Compounding is what makes the MSMED Act bite. Over a year the difference between simple and compound interest at 19.5% is small; over three years it is large, and the buyer cannot deduct any of it for tax. Showing the buyer a monthly table makes the cost of each further month of delay concrete. Use the MSME interest calculator, and read about the RBI bank rate that sets the base.
How FundRaksha uses it
FundRaksha's notices and Samadhaan claims always include the monthly compounding table, segmented for bank rate changes, so the figure withstands scrutiny before the Council. Across ₹50 Cr+ of invoices handled, this precision has helped settle about 60% of cases before any hearing. Fee: 30% of recovery.
Worked example (hypothetical)
Principal ₹10,00,000 overdue for 36 months. Assume the bank rate is 6.5% throughout, so the Section 16 rate is 19.5% a year, 1.625% a month. Compound with monthly rests: ₹10,00,000 × (1.01625)^36 ≈ ₹17,86,500, so interest of about ₹7,86,500. Simple interest at 19.5% for three years would be ₹5,85,000. Compounding adds roughly ₹2,01,500 over three years. If instead the bank rate were 6% (18% a year, 1.5% a month), the compound amount would be ₹10,00,000 × (1.015)^36 ≈ ₹17,09,100, interest about ₹7,09,100.
Last reviewed: 2026-10-08. Information for Indian businesses; not legal advice.