MSME New Rules 2026: Revised Classification, MSMED Amendment Act and the 45-Day Payment Rule

MSME rules in India have changed three times in quick succession. The classification limits were raised from April 2025. The 45-day payment rule under Section 43B(h) of the Income-tax Act has been changing how buyers pay small suppliers since FY 2023-24. And in 2026, Parliament amended the MSMED Act itself, overhauling registration, penalties and dispute resolution.

If you own a small business, these changes decide whether you still count as an MSME, how quickly your customers must pay you, and what you can do when they don't. This guide pulls all the new rules into one place.

Quick answer: Under the MSME new rules effective from 1 April 2025, an enterprise is micro if investment is up to ₹2.5 crore and turnover up to ₹10 crore, small up to ₹25 crore investment and ₹100 crore turnover, and medium up to ₹125 crore investment and ₹500 crore turnover. The MSMED (Amendment) Act, 2026 makes Udyam registration voluntary and free, mandates TReDS for central PSUs, and introduces graded penalties for buyers who fail to report dues to MSMEs.

MSME New Definition 2025: Revised Classification Limits

The Union Budget 2025-26 announced higher limits, and the Ministry of MSME notified them to take effect from 1 April 2025. The criteria remain composite: an enterprise must satisfy both the investment and turnover tests for a category.

The same limits apply to manufacturing and service enterprises.

How investment and turnover are counted

1. Investment is the written-down value of plant, machinery or equipment, as per the previous year's ITR. Land, buildings and furniture are excluded.
2. Turnover excludes export turnover, which is a meaningful benefit for exporters.
3. Data is pulled automatically from the GST and ITR systems linked to your PAN.

What happens if you outgrow your category

If your turnover or investment rises above a category limit, you move to the higher category. If you fall below, you move down only after one full year. An enterprise that crosses the medium limits stops being an MSME.

Example: A packaging unit in Ludhiana with ₹2 crore plant investment and ₹8 crore turnover was "small" under the old limits. Under the 2025 rules, it is now micro, which can matter for micro-specific schemes and credit guarantee coverage.

MSMED Amendment Act 2026: What Changed

The Micro, Small and Medium Enterprises Development (Amendment) Bill, 2026 was introduced in the Rajya Sabha on 28 July 2026. It received Presidential assent on 13 August 2026 and is published as Act No. 16 of 2026.

Commencement dates

These dates come from Notification S.O. 5575(E) dated 12 October 2026, as reported in secondary legal updates. Verify against the Gazette copy on msme.gov.in before relying on them.

Key changes

1. Classification limits move out of the Act. The Act no longer fixes investment thresholds. The central government now sets limits by notification using investment and turnover. The ₹2.5 crore / ₹25 crore / ₹125 crore limits above continue to apply.

2. Registration becomes voluntary, digital and free. Filing a memorandum (Udyam registration) is now voluntary for all categories. Earlier, it was technically mandatory for medium manufacturing units. Existing Udyam registrations remain valid; you do not need to register again.

3. TReDS is mandatory for central PSUs. Every Central Public Sector Enterprise must settle invoices from MSME suppliers through an RBI-authorised TReDS platform. Governments can extend this to other public sector buyers.

4. Faster dispute resolution (once notified). Mediation must be completed within 90 days. If it fails, arbitration must start within 30 days, with an award due within 90 days of pleadings. Courts can order at least 50% of the award to be paid to the MSME if a challenge has been pending for over six months.

5. Graded penalties.

The Development Commissioner (MSME) acts as the adjudicating officer, and penalty floors rise by 10% every three years.

Read our detailed breakdown of the MSME Amendment Bill 2026.

MSME 45 Days Payment Rule Under Section 43B(h)

This rule is in the Income-tax Act, not the MSMED Act, but it is the "new rule" MSME owners ask about most.

What it says: A buyer can deduct a payment to a micro or small enterprise as an expense only in the year it is actually paid, if the payment is made beyond the time limit in Section 15 of the MSMED Act.

Who it applies to:

1. It protects micro and small enterprises registered on Udyam. Medium enterprises are not covered.
2. Trading enterprises registered on Udyam do not get this protection (traders can register only for priority sector lending).
3. The rule applies from FY 2023-24 onwards.

Example: A Delhi-based retailer buys ₹10 lakh of goods from a micro manufacturer on 15 February 2026, with a 45-day credit agreement. If the retailer pays on 10 April 2026 (beyond 45 days and after the year-end), it cannot claim the ₹10 lakh as an expense in FY 2025-26. The deduction shifts to FY 2026-27, increasing the retailer's tax for 2025-26.

The practical effect: larger buyers now prefer suppliers who can accept longer credit through other routes, or they pay MSMEs faster. If you are a micro or small supplier, put your credit terms in writing and quote your Udyam number on every invoice.

Udyam Registration New Rules

1. Registration remains free on the official Udyam portal. Any website charging a "government fee" is not the government portal.
2. Registration is now voluntary for all categories under the 2026 amendment, but you need it to claim most MSME benefits, including 43B(h) protection, collateral-free loans under CGTMSE, and the delayed payment remedy through MSEFC.
3. GST and ITR data is integrated, so your category updates automatically every year.
4. Udyam Assist registration is available for informal micro enterprises without GST.

See our guide on how to complete Udyam registration online.

MSME New Rules Benefits

What MSMEs Should Do Now

1. Log in to Udyam and check your current category under the new limits.
2. Put payment terms in writing in purchase orders and agreements, capped at 45 days.
3. Mention your Udyam number and category on invoices, so buyers know 43B(h) applies.
4. Register on a TReDS platform if you supply to central PSUs.
5. Review your MSME-1 reporting if you are a company buying from MSMEs and owe dues beyond 45 days.

Frequently Asked Questions

1. What are the new MSME limits from April 2025? Micro: investment up to ₹2.5 crore and turnover up to ₹10 crore. Small: up to ₹25 crore and ₹100 crore. Medium: up to ₹125 crore and ₹500 crore.

2. Is Udyam registration mandatory after the 2026 amendment? No. It is voluntary for all categories, but you need it to claim most MSME benefits.

3. Do I need to re-register on Udyam because of the new rules? No. Existing registrations continue to be valid, and your category is updated using GST and ITR data.

4. Does the 45-day rule apply to traders? No. Section 43B(h) protects micro and small manufacturers and service providers registered on Udyam, not traders.

5. Does the 45-day rule apply to medium enterprises? No. Only micro and small enterprises are covered.

6. Is export turnover counted in MSME classification? No. Export turnover is excluded when calculating turnover for classification.

7. When did the MSMED Amendment Act 2026 come into force? Most provisions from 15 October 2026, Facilitation Council changes from 15 December 2026, and the mediation and recovery provisions on a date yet to be notified.