Under Section 16, a buyer who fails to pay a micro or small enterprise by the Section 15 due date must pay compound interest, with monthly rests, at three times the bank rate notified by the Reserve Bank of India. The interest runs from the appointed day or the agreed date until actual payment, whether or not the contract mentions interest.
How Section 16 interest works in India
The RBI bank rate is published by the Reserve Bank and moves with monetary policy. Section 16 takes that rate, multiplies it by three, and applies it on a monthly compounding basis. A rate of 6.5% becomes 19.5% a year, or 1.625% per month; each month the interest is added to the balance, so the effective annual cost is a little over 21%. Compare this with the 9% to 12% that civil courts usually allow, or the 18% that most contracts state but rarely get.
The interest is payable whether the buyer is a company, a proprietor or a government department, and it cannot be waived by a clause in the purchase order.
Why it matters for getting paid
Section 16 changes the buyer's arithmetic. Holding a supplier's ₹10 lakh for a year costs more than ₹2 lakh in interest that the buyer cannot even deduct for tax, versus roughly ₹1 lakh if the buyer had taken a working-capital loan. A notice that spells this out often produces a payment plan quickly. Use the MSME interest calculator and read compound interest with monthly rests.
How FundRaksha uses it
FundRaksha's advocates attach a month-by-month Section 16 computation to every MSME legal notice and Samadhaan claim. The number is often the lever that gets the principal paid, and when a claim goes to award the interest is part of what is recovered, on which the 30% fee is charged. Nothing is charged upfront.
Worked example (hypothetical)
Principal ₹10,00,000, due 1 April, unpaid for 12 months. Assume the bank rate is 6.5%, so the Section 16 rate is 19.5% a year, 1.625% a month. Month 1 interest: ₹16,250; balance ₹10,16,250. Month 2: ₹16,514; balance ₹10,32,764. Continuing for 12 months gives a balance of about ₹12,13,400, so interest of roughly ₹2,13,400. Simple interest at the same rate would have been ₹1,95,000; compounding adds about ₹18,400. If the bank rate were 6%, the rate would be 18% a year and interest about ₹1,95,600 instead. Always use the rate in force for the period.
Last reviewed: 2026-10-08. Information for Indian businesses; not legal advice.