Under Section 3 of the Interest Act, 1978, in proceedings for recovery of a debt or damages, the court may allow interest at a rate not exceeding the "current rate of interest" (linked to scheduled bank deposit rates notified by the RBI) from the date the debt became payable if payable on a certain date, or otherwise from the date of a written notice demanding payment with interest, until the institution of proceedings. Section 4 preserves any higher contractual or statutory interest, such as Section 16 of the MSMED Act.
How the Interest Act works in India
The Act splits interest into periods. For the period before the suit, Section 3 applies: the supplier must show either a fixed due date or a written demand that specifically claims interest. For the period during the suit (pendente lite) and after the decree, Section 34 of the CPC applies. The rate under the Interest Act is capped at the current rate of interest, so courts typically award 6% to 12% depending on the period and commercial context; the Act does not permit compound interest unless the contract or another statute provides for it.
- Fixed due date on the invoice or PO: interest can run from that date.
- No due date: send a written demand claiming interest; interest runs from the demand.
- Contract rate agreed (e.g., 18%): claim under the contract; the Act does not cap it.
Why it matters for getting paid
Many suppliers assume that without an interest clause they can only recover the principal. The Interest Act says otherwise, provided a written demand for interest was made. That is why every FundRaksha legal notice states a due date and demands interest expressly. For registered micro and small enterprises the far higher Section 16 interest applies instead. See also pendente lite interest.
How FundRaksha uses it
FundRaksha's advocates draft notices that fix the date from which Interest Act interest runs and state the rate claimed, and plead the Act in every suit and arbitration for non-MSME clients. Interest recovered is part of the amount on which the 30% fee is calculated, so the claim is always made. Start with a free consultation.
Worked example (hypothetical)
A Guwahati tea packer (not Udyam-registered, no interest clause) delivers ₹10,00,000 of goods on 1 January; the invoice says "payment within 30 days", so the debt is payable on 31 January. A written demand for the principal and interest at 12% is served on 1 July. A suit is filed on 1 January of the following year. Under Section 3, interest may be allowed from 31 January (the fixed due date) to the filing date: 11 months at, say, 9% awarded by the court, roughly ₹82,500. Pendente lite and future interest are then fixed under Section 34 CPC. Had the invoice carried no due date, interest would run only from the 1 July demand: 6 months, about ₹45,000 at 9%.
Last reviewed: 2026-10-08. Information for Indian businesses; not legal advice.