Section 16 imposes compound interest with monthly rests at three times the RBI bank rate on any sum not paid as required by section 15. It applies despite a contrary contract or law. Because the rate is tied to a benchmark that changes and the interest compounds, the exposure is easy to understate with a flat percentage.

1. What triggers the liability

If a buyer fails to pay as required by section 15, section 16 makes it liable to pay compound interest with monthly rests on the amount, running from the appointed day or, where there is a written agreement, from the day immediately after the agreed date. The rate is three times the bank rate notified by the Reserve Bank. The section applies notwithstanding any agreement between the parties or any other law. Section 17 then makes the buyer liable for the principal together with that interest, which is what a Facilitation Council can award.

2. The arithmetic, and why a flat percentage misleads

The illustration uses an overdue principal of ₹5,00,000 and a bank rate of 6.50%, assumed purely to show the mechanics; an actual calculation must use the RBI bank rate for each period of delay. Three times 6.50% is 19.50% a year, or 1.625% a month, compounded monthly.

The gap is small in the first months and grows steadily after the first year. A buyer that estimates its exposure with a simple-interest formula will be least accurate on exactly the old, disputed invoices where the sums are largest.

3. Building a calculation another reviewer can reproduce

•      Fix the start date from section 16: the appointed day, or the day after the agreed date.

•      Split the delay into periods wherever the RBI bank rate changed, and record the source for each rate.

•      Apply part-payments from the date they were actually received, and reduce principal at that point.

•      Show opening balance, rate, monthly interest, payment and closing balance for each month, and keep principal and interest in separate columns.

4. Tax and accounts treatment

Section 23 of the MSMED Act provides that this interest is not allowed as a deduction under the Income-tax Act. That differs from section 43B(h), which defers the deduction for the principal. Section 22 separately requires an audited buyer to show the principal and the interest due separately in its annual accounts (Article 6), and item (v) of that section is expressly tied to the disallowance under section 23.

5. How long can interest be claimed?

In Sonali Power Equipments v. MSEB (17 July 2025) the Supreme Court held that the Limitation Act does not apply to conciliation under section 18(2), so a time-barred claim can still be taken to conciliation and settled. It does apply to arbitration under section 18(3). It also said that whether a balance-sheet disclosure under section 22 extends limitation as an acknowledgement of liability must be decided case by case. A supplier cannot assume that interest keeps compounding indefinitely in an arbitration, and a buyer cannot assume that old dues are safe.