If you are a Udyam-registered micro or small manufacturer or service provider, any buyer that has not paid you within the MSMED Act limit (agreed term up to 45 days, or 15 days without an agreement) loses the deduction for that expense for tax year 2026-27 under Section 37(2)(g) of the Income-tax Act, 2025, the successor of Section 43B(h). Send a ledger statement and a polite reminder that names the rule in February, follow up in early March, and escalate with a legal notice that adds statutory interest if there is no payment by mid-March.
Why March is the month
Three rules meet at the financial year-end. The buyer's income-tax deduction for your invoice depends on paying within your Section 15 due date. A company buyer must list MSE dues beyond 45 days in its MSME Form 1 for October to March, due 30 April. And its auditors check the Section 22 note of MSE dues in the accounts. None of these needs your contract to mention them; they apply because you are a registered micro or small enterprise.
The buyer cannot cure an overdue invoice by paying in April. Section 37(3) of the Income-tax Act, 2025 lets other expenses be saved by payment before the return due date, but expressly not MSE dues. That is the pressure point.
A February to March timeline
| When | What to send | What it says |
|---|---|---|
| First week of February | Ledger statement and balance confirmation request | Outstanding invoices with acceptance dates and Section 15 due dates |
| Mid-February | Reminder to the finance head, not just purchase | The deduction for these invoices depends on payment within the MSMED Act limit |
| First week of March | Second reminder with the interest figure | Interest under Section 16 at three times the bank rate is accruing monthly |
| Mid-March | Legal notice from an advocate | Pay principal and interest within 7 to 15 days or the claim goes to the Facilitation Council |
| After 31 March | File on the MSME ODR portal if unpaid | The Council decides; the buyer must deposit 75% to challenge an award |
Keep the tone factual. A line such as "As you close your books for tax year 2026-27, please note these invoices are from a small enterprise registered under the MSMED Act (Udyam number attached); payment within the Section 15 time limit keeps your deduction under Section 37(2)(g)" is accurate and lands with a CFO. A payment reminder letter format and an MSMED Act notice format are ready to copy.
Worked example (hypothetical)
A small enterprise in Faridabad supplies castings to a listed auto-parts company. Two invoices are open in February 2027:
- ₹8,00,000, accepted 10 December 2026, PO term 60 days. The Section 15 due date is 24 January 2027 (45 days). It is already overdue. Unless paid, the buyer loses this deduction for 2026-27, roughly ₹2,00,000 of tax at an assumed 25% rate.
- ₹5,00,000, accepted 10 February 2027, PO term 60 days. Due date 27 March 2027 (45 days). Paid by then, the buyer keeps the deduction; paid on 5 April, it does not.
The supplier sends a statement on 2 February, a reminder on 16 February naming both due dates, and a second reminder on 3 March with the interest on the first invoice. Assuming a bank rate of 6.5% (19.5% a year, 1.625% a month compounded), interest on ₹8,00,000 for two months is about ₹26,200. The buyer pays both invoices on 20 March. The supplier can still claim the interest; many settle for the principal on time and waive it, which is a commercial choice. Use the MSME interest calculator for your own figures.
When it does not work
- You are a trader or a medium enterprise: the rule does not cover your invoices. Use ordinary reminders, a legal notice and the limitation clock instead.
- Registration after the supply: invoices from before your Udyam date are generally outside the MSMED Act.
- Genuine quality dispute: settle the dispute in writing first; the rule assumes acceptance.
- Loss-making buyer: a buyer with no taxable profit feels little tax pain; lean on interest, MSME-1 and the Council.
FundRaksha has helped 700+ businesses get paid, and about 60% of its cases settle before court, often at exactly this point in the year. A free consultation tells you which invoices qualify.
Sources
Last reviewed: 2026-10-21. Information for Indian businesses; not legal advice.