Payment Terms Clause: Meaning, Sample & Drafting Tips (India)
A payment terms clause sets how much is payable, when invoices are raised, the credit period, taxes, withholding, late-payment interest and how disputed invoices are handled. In India, buyers dealing with micro and small enterprises must also respect the 45-day limit and interest rules in the MSMED Act, 2006, whatever the contract says.
How it works under Indian law
Under section 15 of the Micro, Small and Medium Enterprises Development Act, 2006, a buyer must pay a micro or small enterprise supplier within the agreed period, which cannot exceed 45 days from acceptance (or deemed acceptance) of the goods or services; where nothing is agreed, the limit is 15 days. Section 16 imposes compound interest with monthly rests at three times the bank rate notified by the RBI on delayed payments, and section 18 allows the supplier to refer the dispute to the MSE Facilitation Council.
Tax law reinforces this. Under the income-tax provisions introduced from assessment year 2024-25 (section 43B(h) of the Income-tax Act, 1961), a buyer could deduct amounts owed to micro and small enterprises only when actually paid within the MSMED Act timeline. Check how the Income-tax Act, 2025 carries this rule forward for later years.
Invoices must meet GST invoicing requirements, and the clause should say whether prices are inclusive or exclusive of GST and who bears tax deducted at source (TDS) — the payer deducts and issues a certificate, and the payee takes credit.
Drafting checklist
- State the price basis (fixed, time and materials, milestones) and invoicing frequency.
- Set the credit period — and check the MSMED Act 45-day ceiling if the supplier is a micro or small enterprise.
- Say whether prices include GST, and how TDS will be handled.
- Provide a disputed-invoice mechanism with a deadline and payment of the undisputed portion.
- Fix late-payment interest (respecting the MSMED Act where it applies).
- Address set-off, currency, bank charges, price escalation and suspension for non-payment.
Sample payment terms clause
Two versions: a standard position and an alternative you can offer in negotiation. Replace every [placeholder] before use.
Standard payment clause
Standard position[Supplier] shall invoice [Customer] [monthly in arrears / on the milestones in Schedule X]. Each invoice shall be a valid tax invoice under applicable GST law and shall be accompanied by the supporting documents reasonably requested by [Customer]. [Customer] shall pay each undisputed invoice within [30] days of receipt by electronic transfer to the account notified in writing by [Supplier]. All Fees are exclusive of GST, which shall be payable in addition at the applicable rate. [Customer] may deduct tax at source as required by law and shall provide the corresponding certificate within the statutory period. If [Customer] disputes any part of an invoice in good faith, it shall notify [Supplier] in writing with reasons within [10] days of receipt and pay the undisputed portion; the Parties shall resolve the dispute under Clause [Dispute Resolution]. Late payments of undisputed amounts shall carry simple interest at [rate]% per annum from the due date until payment.
Supplier-favourable version (MSME supplier with suspension right)
Supplier-favourable — suits a registered micro or small enterprise supplier[Supplier] is registered as a [micro / small] enterprise under the Micro, Small and Medium Enterprises Development Act, 2006 (Udyam Registration No. [number]). [Customer] shall pay each invoice within [30] days, and in no event later than 45 days, from the date of acceptance or deemed acceptance of the goods or services. Any delayed payment shall carry interest as provided under section 16 of that Act. If any undisputed amount remains unpaid for more than [15] days after its due date, [Supplier] may, on [7] days' written notice, suspend performance until payment is received, without liability for the suspension. Acceptance shall be deemed to occur if [Customer] does not raise a written objection within [15] days of delivery.
Who pushes for what
Typical negotiating positions on each side of the table.
Customer / buyer
Wants longer credit periods, payment only on acceptance, a right of set-off and no suspension right.
Supplier / service provider
Wants advance or milestone payments, short credit periods, interest on late payment and a suspension right.
Common middle ground
30-day terms from a valid invoice, deemed acceptance after a review window, interest after a short grace period.
Common mistakes
- A 60- or 90-day credit period with an MSE supplier — the statute overrides it and interest still accrues.
- No disputed-invoice process, so one disputed line item holds up the whole invoice.
- Silence on GST, leading to arguments about whether the quoted price included tax.
- Not capturing the supplier's MSME status at onboarding.
Frequently asked questions
What is the MSME 45-day payment rule?
Section 15 of the MSMED Act, 2006 requires buyers to pay micro and small enterprise suppliers within the agreed period, which cannot exceed 45 days from acceptance. If no period is agreed, the limit is 15 days. Delayed payments attract compound interest at three times the RBI bank rate.
Can a contract override the MSMED Act timeline?
No. The Act caps the agreed period at 45 days and the interest under section 16 applies notwithstanding anything in the contract.
Should fees be stated inclusive or exclusive of GST?
Either is fine if it is stated clearly. Most B2B contracts state fees exclusive of GST, with GST added at the applicable rate on a valid tax invoice.
Related tools, formats and guides
Build a clause library with approved fallbacks in CaseDocker
Store your approved clause language and pre-agreed fallback positions in CaseDocker's Contract Management module, and use Playbooks to route any deviation to the right approver before the contract goes out for signature.