The MSME Act 2006 (MSMED Act) in 2026: Key Sections, Payment Rules and the 2026 Amendment

The Micro, Small and Medium Enterprises Development Act, 2006, usually called the MSMED Act or simply the "MSME Act 2006", is the law behind almost every MSME benefit you hear about. It is the source of the micro, small and medium definitions, Udyam registration, the 45-day payment rule and the state councils that recover delayed payments. This guide is for business owners, accountants, procurement teams and students who need to know what the Act actually says in 2026. It walks through each chapter with section numbers, how the classification has been revised, the delayed-payment chapter with a worked ₹ example, the penalties, and what the MSMED (Amendment) Act, 2026 will change once it is brought into force.

Quick answer

The MSMED Act 2006 (Act 27 of 2006) defines MSMEs (section 7), provides for their registration (section 8, now Udyam), supports them through procurement and credit measures (sections 9–14), and protects micro and small suppliers from late payment (sections 15–24). Under it, a buyer must pay within the agreed period, capped at 45 days, or owe compound interest at 3× the RBI bank rate. Disputes go to a state MSEFC. Parliament amended the Act in August 2026, but the amendment is not yet brought into force (no commencement notification as of 8 October 2026).

• Current limits (from 1 April 2025): micro up to ₹2.5 crore investment / ₹10 crore turnover

• Small up to ₹25 crore / ₹100 crore; medium up to ₹125 crore / ₹500 crore

• Delayed-payment protection covers only micro and small suppliers, not medium enterprises or traders

• MSEFC must decide a reference within 90 days; a buyer challenging the award must first deposit 75% of the awarded amount

What the MSMED Act is and why it matters

Before 2006, India had no single law for small business. "Small scale industries" were defined by executive notifications under the Industries (Development and Regulation) Act, 1951. Delayed payments were covered by a weak 1993 Act, and services were largely ignored. The MSMED Act, passed in June 2006 and in force from 2 October 2006, changed three things. It brought service enterprises into the definition alongside manufacturers. It recognised medium enterprises for the first time. And it replaced the 1993 delayed-payments law (section 32 repeals the Interest on Delayed Payments to Small Scale and Ancillary Industrial Undertakings Act, 1993) with a much stronger regime.

It is a central law that applies across India. States implement parts of it: they notify the authorities for registration of micro and small units and set up the Micro and Small Enterprises Facilitation Councils. The Ministry of MSME administers it through the Development Commissioner (MSME).

Nearly every scheme you deal with refers back to it. Banks use its definitions for priority-sector lending, government buyers use it for the public procurement quota, the Income-tax Act uses its supplier definition for the 45-day deduction rule, and the GeM portal asks for your Udyam number because of it. As of August 2026, 9.16 crore enterprises were registered on Udyam, including the Udyam Assist platform for informal micro units.

How the Act is organised: chapters and sections

The Act has 32 sections. The chapter headings in the official text are numbered unevenly, with two "Chapter III" headings, but the structure is easy to follow:

Three definitions in section 2 do most of the work in disputes:

• Supplier: a micro or small enterprise that has filed a memorandum under section 8. The words "micro or small" are why medium enterprises are not covered by the payment chapter.
• Buyer: anyone who buys goods or receives services from a supplier for consideration. This includes government departments, PSUs and large companies, and the buyer need not be an MSME.
• Day of acceptance: the day goods are delivered or services rendered. If the buyer objects in writing within 15 days, it is the day the objection is removed. With no written objection, acceptance is deemed on the day of delivery.

Section 7: how MSMEs are classified, and how the limits have changed

Section 7 lets the Central Government classify enterprises after consulting the Advisory Committee set up under section 7(2). Section 7(9) allows it to vary the investment criterion and to "consider criteria or standards in respect of employment or turnover". That one clause allowed the government to move from an investment-only test to a combined test in 2020 without amending the Act.

How the MSME definition has changed under section 7

2 Oct 2006

Investment-only test, with separate limits for manufacturing (plant and machinery) and services (equipment)

1 Jul 2020

S.O. 2119(E): one composite test of investment AND turnover for both sectors; exports excluded; Udyam replaces UAM

18 Oct 2022

S.O. 4926(E): enterprises that grow keep non-tax benefits for three years

1 Apr 2025

S.O. 1364(E): limits raised to 2.5× investment and 2× turnover (Budget 2025-26)

13 Aug 2026

Amendment Act puts investment and turnover into the Act itself, with thresholds left to notification (not yet in force)

The original 2006 limits were based only on investment in plant and machinery (manufacturing) or equipment (services):

In the composite columns, the first figure is the investment limit and the second the turnover limit. Both must be within the limit for a category.

The 2020 notification, S.O. 2119(E), still governs how the test works. Investment is taken from the income-tax return and excludes land, buildings, furniture and fittings. Export turnover is excluded from turnover. All GSTINs under one PAN count as one enterprise. An enterprise moves up a category if it crosses either limit, but moves down only if it falls below both. The 2025 notification changed only the numbers. Our MSME classification guide works through the calculation with examples.

Explanation I to section 7(1) still matters. The cost of pollution control equipment, research and development, industrial safety devices and other notified items is left out of investment. If you are near a limit, make sure these are identified separately in your fixed asset register.

Section 8: the memorandum, from EM to Udyam

Section 8 is the legal basis for MSME registration. As enacted, it required medium manufacturing enterprises to file a memorandum and left filing optional for everyone else. Filing was originally an Entrepreneurs Memorandum (EM Part I/II) with the District Industries Centre. From 2015 it became the online Udyog Aadhaar Memorandum (UAM). Since 1 July 2020 it has been Udyam Registration, which is free, paperless and based on self-declaration, with PAN and GST data pulled in automatically.

In law, Udyam is still optional for micro and small units. In practice it is essential, because the delayed-payment protection only applies to a supplier that "has filed a memorandum". In Silpi Industries v. Kerala SRTC (2021), the Supreme Court held that registration operates prospectively, so supplies made before you registered are not protected. If you have not registered, our Udyam registration guide takes about 15 minutes to follow, and the fee is Free.

Sections 9–14: promotion, credit and procurement

This part of the Act is short and mostly enabling. It authorises the government to act rather than giving you a right you can enforce:

• Section 9 lets the Centre notify programmes and guidelines for skill development, technology upgrading, marketing support, infrastructure and cluster development. Many Ministry schemes trace their legal basis here.
• Section 10 says credit policies and practices for MSMEs should be "progressive". RBI's priority-sector rules and its MSME lending directions operate in this space.
• Section 11 lets the government notify procurement preference policies for goods and services produced by micro and small enterprises. This is the basis of the Public Procurement Policy for MSEs Order, 2012. It requires central ministries and PSUs to buy at least 25% of their annual procurement from MSEs, including 4% from SC/ST-owned and 3% from women-owned units.
• Sections 12–14 provide for funds and Central grants to support these measures and for how the funds are administered.

Sections 15–24: the delayed-payment chapter

This chapter is the part of the Act most people mean when they cite "the MSME Act". It protects micro and small suppliers only, and its provisions override any contract term (section 24).

Delayed-payment rules in the MSMED Act (2026)

45 days

Maximum agreed credit period

s.15, from acceptance

15 days

Due date if nothing agreed in writing

s.2(b) appointed day

17.25%

Interest a year, compounded monthly

s.16: 3 × 5.75% Bank Rate

161

MSE Facilitation Councils in India

s.20–21

• Section 15: the buyer must pay on or before the date agreed in writing, capped at 45 days from acceptance or deemed acceptance. With no written agreement, payment is due by the appointed day, 15 days after acceptance.
• Section 16: if the buyer pays late, it owes compound interest with monthly rests at three times the RBI Bank Rate, from the due date, whatever the contract says. With the Bank Rate at 5.75% from 7 October 2026, that is 17.25% a year.
• Section 17: the buyer is liable for the amount due plus that interest.
• Section 18: either party can refer a dispute to the Micro and Small Enterprises Facilitation Council (MSEFC). The council first tries mediation (which replaced conciliation under the Mediation Act, 2023), then arbitration. The council where the supplier is located has jurisdiction, wherever the buyer is. A reference must be decided within 90 days.
• Section 19: a buyer that wants a court to set aside an award must first deposit 75% of the awarded amount. The court can release part of it to the supplier.
• Sections 20–21: states set up MSEFCs and decide their membership. There are currently 161 across states and union territories.
• Section 22: a buyer whose accounts must be audited has to disclose, in its annual statement of accounts, the principal and interest unpaid to micro and small suppliers at year-end.
• Section 23: interest paid under section 16 is not deductible for income tax.
• Section 24: sections 15–23 override anything inconsistent in any other law.

Worked example. A Ludhiana micro manufacturer delivers ₹8,00,000 of fasteners on 2 June 2026. The buyer raises no written objection, and the purchase order promises "payment in 75 days". Section 15 caps the credit period at 45 days, so payment falls due on 17 July 2026, regardless of the 75-day term. The buyer pays on 14 October 2026, which is 89 days late. At 16.5% (three times the 5.50% Bank Rate in force for most of the delay), compounded monthly, interest is about ₹33,000. If the council applies the higher 17.25% rate from 7 October for the last week, the difference is small. The buyer cannot deduct this interest for tax (section 23). If the buyer is a company that had to be audited for 2026-27, it must also show the unpaid amount in its accounts (section 22). Check your own figures with our delayed payment calculator.

The income-tax link. The Finance Act 2023 tied the Income-tax Act to section 15. Under section 43B(h) of the 1961 Act, and from tax year 2026-27 under section 37(2)(g) of the Income-tax Act, 2025, a buyer can deduct a payment due to a micro or small supplier only in the year it is actually paid, if it is paid after the section 15 deadline. That one rule has done more to speed up payments than decades of MSEFC orders.

How an MSEFC case runs today

Delayed-payment dispute under section 18 (current law)

Step 1

Unpaid invoice past 45 days

Step 2

Written demand citing s.15–16

Step 3

File on MSME ODR portal

replaced Samadhaan for new cases

Step 4

Pre-council negotiation

Step 5

MSEFC mediation

s.18(2)

Step 6

Arbitration and award

decision due within 90 days of reference

Step 7

Challenge only after 75% deposit

s.19

Since October 2025, new cases are filed on the MSME ODR Portal rather than the old Samadhaan system. The portal adds a guided negotiation stage before the council. If that fails, the case goes to your state MSEFC for mediation and, if needed, arbitration under the Arbitration and Conciliation Act, 1996. The Supreme Court has held that the Limitation Act applies, so file within three years of the payment falling due. Our MSME Samadhaan guide covers filing step by step, along with the most common rejection reasons.

Penalties under the Act today

Section 27 is the only penalty provision. Under the current text:

• Contravening section 8(1), or the rules on the memorandum, attracts a fine of up to ₹1,000 on first conviction. A subsequent conviction attracts ₹10,000 or more. S.O. 2119(E) applies this to anyone who misrepresents or suppresses facts in a Udyam registration or update.
• A buyer that fails to make the section 22 disclosure faces a fine of at least ₹10,000.

These are criminal fines that a court imposes, so they are rarely pursued. The bigger practical risk for a false Udyam declaration is cancellation of the registration after a District Industries Centre enquiry, and losing the benefits that went with it.

The MSMED (Amendment) Act, 2026: what changes and when

The Amendment Bill was introduced in the Rajya Sabha on 28 July 2026 and passed by Parliament in August. It was published as Act 16 of 2026 on 13 August 2026. Under its section 1(2), its provisions come into force on dates the Central Government notifies, and different provisions can start on different dates. When we checked on 8 October 2026, it was not yet brought into force (no commencement notification as of 8 October 2026). Until then, the original sections described above continue to apply.

MSMED Act now vs after the 2026 amendment commences

Provision	In force today	After commencement
s.7 classification	Investment in the Act; turnover added by notification (S.O. 2119(E))	Investment and turnover both in the Act; thresholds by notification
s.8 registration	Mandatory for medium manufacturing; optional for others	Free and voluntary for all on a notified national platform; states may add their own
Central PSU payments	Any mode	All MSME invoices settled through TReDS; states can extend this to their PSUs
MSEFCs	One or more per state	Multiple councils with infrastructure, digital systems and trained staff
Mediation and arbitration	Overall 90 days for the reference	Mediation in 90 days; referral to arbitration within 30 days; award within 90 days of pleadings
Challenging an award	75% of the awarded amount deposit	Same deposit, also for mediated settlements; at least 50% released if pending over six months
Recovery	Execution as a court decree	Also as arrears of land revenue through the District Collector
False information / non-disclosure	Criminal fines under s.27	Warning first, then civil penalties (₹1,000–₹50,000; ₹10,000–₹1 lakh), set by an adjudicating officer

s.7 classification

In force today

Investment in the Act; turnover added by notification (S.O. 2119(E))

After commencement

Investment and turnover both in the Act; thresholds by notification

s.8 registration

In force today

Mandatory for medium manufacturing; optional for others

After commencement

Free and voluntary for all on a notified national platform; states may add their own

Central PSU payments

In force today

Any mode

After commencement

All MSME invoices settled through TReDS; states can extend this to their PSUs

MSEFCs

In force today

One or more per state

After commencement

Multiple councils with infrastructure, digital systems and trained staff

Mediation and arbitration

In force today

Overall 90 days for the reference

After commencement

Mediation in 90 days; referral to arbitration within 30 days; award within 90 days of pleadings

Challenging an award

In force today

75% of the awarded amount deposit

After commencement

Same deposit, also for mediated settlements; at least 50% released if pending over six months

Recovery

In force today

Execution as a court decree

After commencement

Also as arrears of land revenue through the District Collector

False information / non-disclosure

In force today

Criminal fines under s.27

After commencement

Warning first, then civil penalties (₹1,000–₹50,000; ₹10,000–₹1 lakh), set by an adjudicating officer

A few points that commentaries often miss:

• Classification won't change on day one. The amendment puts "investment and turnover" into section 7 but leaves the actual thresholds to notification. Until a new notification is issued, the 2025 limits continue under S.O. 2119(E) as amended.
• Penalties become administrative. The Development Commissioner (MSME) will act as adjudicating officer, with appeals to the Secretary, MSME. Minimum penalties rise by 10% every three years.
• TReDS for CPSEs. Every central public sector enterprise will have to settle MSME invoices through a TReDS platform. Invoices discounted on TReDS rose from ₹40,000 crore in 2022-23 to ₹3.47 lakh crore in 2025-26.
• The 45-day cap and the interest rate are unchanged. The amendment speeds up recovery but does not change what the buyer owes.

Common misreadings of the MSME Act

1. "Every MSME gets 45-day protection." Only micro and small suppliers do. A medium enterprise with a Udyam certificate cannot file before an MSEFC as a supplier.
2. "Traders are covered." Retail and wholesale traders were allowed onto Udyam in July 2021 for priority-sector lending only. The Finance Ministry confirmed in July 2026 that the 43B(h) rule does not apply to purchases from traders.
3. "A 90-day credit term in the contract is valid." Section 15 caps the agreed period at 45 days, and section 24 overrides the contract. Interest runs from day 46.
4. "I can register after the dispute starts." Registration is prospective, so register before you supply.
5. "The 2026 amendment is already law in practice." It has been enacted but not brought into force. Cite the current sections until the commencement notification is issued.
6. "MSME status lasts forever." Classification is updated every year from ITR and GST data. If you grow, you keep non-tax benefits of your old category for three years after the upward change.

Official links

• Udyam Registration portalRegister or update under section 8
• S.O. 1364(E) and S.O. 2119(E) — MSME definitionCurrent limits from 1 April 2025
• PIB — MSMED (Amendment) Bill 2026 explainerWhat the amendment changes
• MSME ODR PortalFile delayed-payment cases under section 18
• RBI FAQs on MSMEs45-day rule and interest
• Ministry of MSMEWatch for commencement and classification notifications

What to do next

If you supply goods or services, get your Udyam registration before your next order, put your Udyam number and a 45-day payment term on every invoice, and use our payment reminder generator when a buyer goes past the deadline. If you buy from MSMEs, run a monthly ageing report of micro and small suppliers, because sections 15, 16, 22 and 23 and the tax rule all apply from day 46. We will update this page when the 2026 amendment is notified.

This is general information, not legal or tax advice — confirm on the official source or with a professional.

Frequently asked questions

What is the MSME Act 2006?

The Micro, Small and Medium Enterprises Development Act, 2006 (Act 27 of 2006) is the central law that defines micro, small and medium enterprises, provides for their registration, sets up the National Board for MSMEs, enables procurement and credit support, and protects micro and small suppliers against delayed payment. It came into force on 2 October 2006 and replaced the 1993 delayed-payments law.

What does section 15 of the MSMED Act say?

Section 15 requires a buyer to pay a micro or small supplier by the date agreed in writing. That date cannot be more than 45 days from the day the goods or services are accepted or deemed accepted. If nothing is agreed in writing, payment is due within 15 days. Section 16 then adds compound interest at 3× the RBI bank rate on late payments.

Has the MSME Act been amended in 2026?

Yes. The MSMED (Amendment) Act, 2026 (Act 16 of 2026) was published on 13 August 2026. It adds turnover to the statutory classification test, makes registration voluntary on a notified digital platform, requires central PSUs to pay MSMEs through TReDS, sets time limits for mediation and arbitration, and decriminalises some offences. As of 8 October 2026 it is not yet brought into force (no commencement notification as of 8 October 2026).

What are the current MSME limits under section 7?

From 1 April 2025, under S.O. 1364(E), a micro enterprise has investment up to ₹2.5 crore and turnover up to ₹10 crore. Small enterprises go up to ₹25 crore and ₹100 crore, and medium enterprises up to ₹125 crore and ₹500 crore. Both tests apply together, and export turnover is excluded.

Does the MSMED Act protect traders and medium enterprises?

Only partly. The delayed-payment chapter (sections 15–24) protects a 'supplier', which the Act defines as a micro or small enterprise that has filed its memorandum, now Udyam. Medium enterprises are not covered as suppliers. Retail and wholesale traders can register on Udyam, but only for priority-sector lending, so they generally cannot use the payment protections or the MSEFC route.

What is the penalty under section 27 of the MSMED Act?

Today, contravening section 8(1) or giving false information attracts a fine of up to ₹1,000 on first conviction and ₹10,000 or more on a later one. A buyer that fails to disclose MSE dues under section 22 faces a fine of at least ₹10,000. Once the 2026 amendment is notified, these become civil penalties after a first warning, imposed by an adjudicating officer.

Sources & verification

Figures on this page were checked against the sources below when it was last reviewed on 8 October 2026. Each rate and limit is stored once with its own official source and review date, and official update channels are monitored daily so changes are picked up. How we verify

1. 1.Micro, Small and Medium Enterprises Development Act, 2006 — bare Act (sections 1–32) — AdvocateKhoj (text of Act 27 of 2006) · accessed 8 October 2026
2. 2.S.O. 1364(E) dated 21 March 2025 (with S.O. 2119(E) dated 26 June 2020) — Ministry of MSME (Gazette of India) · accessed 8 October 2026
3. 3.S.O. 4926(E) dated 18 October 2022 — Ministry of MSME (Gazette of India) · accessed 8 October 2026
4. 4.The MSMED (Amendment) Bill, 2026 — Reforms for a growing MSME sector (11 Aug 2026) — PIB Research · accessed 8 October 2026
5. 5.Bill Summary — MSMED (Amendment) Bill, 2026 — PRS Legislative Research · accessed 8 October 2026
6. 6.MSMED Amendment Act 2026: TReDS, registration, payment, penalties — Corpseed · accessed 8 October 2026
7. 7.MSMED (Amendment) Act, 2026 — TReDS invoice settlement — Jurishour · accessed 8 October 2026
8. 8.RBI FAQs — Micro, Small and Medium Enterprises (30 July 2025) — Reserve Bank of India · accessed 8 October 2026
9. 9.Monetary Policy Statement — MPC resolution, 5–7 October 2026 — Reserve Bank of India · accessed 8 October 2026
10. 10.Registration under MSMED Act and the SC ruling in Silpi Industries — IndiaCorpLaw · accessed 8 October 2026
11. 11.From Delays to Discipline: Unlocking MSME Liquidity through Reforms — ICAI — The Chartered Accountant journal · accessed 8 October 2026
12. 12.Finance Ministry clarifies section 43B(h) 45-day MSME payment rule (Rajya Sabha, 21 July 2026) — TaxGuru · accessed 8 October 2026