Credit Period

A credit period is the number of days a seller gives a buyer to make payment after delivering goods or completing a service. It is the gap between the invoice date and the payment due date. When a seller sends an invoice with "Net 30" written on it, the credit period is 30 days. The buyer has 30 days from the invoice date to pay without any penalty. Credit periods are a standard part of business-to-business trade in India and are one of the most important terms to mention clearly on every invoice. Under Indian law, credit periods for MSME-registered suppliers are now legally capped at a maximum of 45 days under Section 43B(h) of the Income Tax Act, effective from 1st April 2024.

Quick reference

Also known as	Payment terms, trade credit, payment window
Common credit periods in India	Net 15, Net 30, Net 45, Net 60
Starts from	Invoice date or date of delivery, as agreed
Legal cap for MSME suppliers	Maximum 45 days under Section 43B(h) of Income Tax Act
If no written agreement with MSME	Maximum 15 days
Interest on delay from MSME supplier	3 times the RBI bank rate, compounded
Where it appears	On the invoice under "Payment Terms"
GST impact	GST liability arises at time of supply, not at end of credit period

How a credit period works

Here is how credit period flows between a seller and buyer in a typical Indian B2B transaction:

1. You agree on payment terms before the sale. A printing supplier in Chennai and a corporate client in Hyderabad agree that all invoices will be paid within 30 days of the invoice date. This becomes the credit period for their business relationship.

2. You raise an invoice and show the due date. The supplier raises a GST invoice on 1st May for Rs. 45,000. The invoice shows "Payment Terms: Net 30" or directly shows "Due Date: 31st May."

3. The buyer has 30 days to pay. The buyer can pay anytime between 1st May and 31st May without any penalty or interest.

4. If payment is not received by the due date. The invoice becomes overdue. The seller may charge a late payment fee if mentioned in the agreement, or follow up with a payment reminder.

5. GST is unaffected by the credit period. The seller must report this invoice in GSTR-1 and pay GST in the month of May, regardless of whether the buyer pays in May or pays late. GST liability arises at the time of supply, not at the end of the credit period.

Credit period example for Indian businesses

Anand runs a wholesale textile business in Surat. He supplies fabric to three different clients with different credit terms:

• Client A (Mumbai retailer): Net 15 — pays within 15 days, Anand's preferred customer
• Client B (Bengaluru boutique): Net 30 — standard trade credit for most clients
• Client C (Delhi distributor): Net 60 — longer credit for bulk orders above Rs. 5 lakh

If Anand sends an invoice of Rs. 1,20,000 to Client C on 1st June, the due date is 30th July. Anand must pay GST on this supply in his June GSTR-3B, but the actual payment from Client C may only arrive in July. This is the classic cash flow challenge that comes with extended credit periods: you pay tax before you receive money.

If Client C delays beyond 30th July, Anand can charge late payment interest as specified in their agreement. If Client C is an MSME-registered business and Anand is a larger enterprise, the legal maximum credit period would be 45 days, not 60, under the MSME payment rule.

The MSME 45-day payment rule

This is one of the most important developments in Indian business credit terms in recent years. From 1st April 2024, under Section 43B(h) of the Income Tax Act (introduced via the Finance Act 2023), any buyer purchasing goods or services from a Micro or Small Enterprise (MSE) registered under the MSMED Act 2006 must make payment within the following timeframes:

• If no written agreement exists: Payment must be made within 15 days of accepting or receiving the goods or services
• If a written agreement exists: Payment must be made within the agreed credit period, but this period cannot exceed 45 days

If the buyer does not pay within these limits, the expense cannot be claimed as a tax deduction in that financial year. The deduction is allowed only in the year the payment is actually made. Additionally, the MSME supplier can charge compound interest at three times the RBI bank rate from the day the payment was due.

Critical for Indian businesses buying from MSMEs: If you are a business that purchases goods or services from any Udyam-registered Micro or Small Enterprise, you must now track and pay those invoices within 45 days. Delaying payment beyond 45 days means you lose the tax deduction for that expense in the current year. This rule applies to you even if you are not registered under the MSME Act yourself.

Common credit period terms used on Indian invoices

Term	Meaning
Net 15	Full payment due within 15 days of invoice date
Net 30	Full payment due within 30 days of invoice date
Net 45	Full payment due within 45 days of invoice date
Net 60	Full payment due within 60 days of invoice date
Due on receipt	Payment due immediately upon receiving the invoice
2/10 Net 30	2% discount if paid within 10 days, otherwise full amount due in 30 days
End of month (EOM)	Payment due at the end of the month in which the invoice was raised
45 days EOM	Payment due 45 days after the end of the invoice month

The most common credit periods in Indian SME and MSME trade are Net 30 and Net 45. For government contracts and large corporates, credit periods of 60 to 90 days are common, though the MSME rule now limits this for qualifying suppliers.

How credit period affects your cash flow

A credit period that is too long creates a serious cash flow problem for small businesses and freelancers, especially under India's GST system. Here is why:

You pay GST before you collect money. When you raise a GST invoice, your tax liability is created immediately. You must report it in GSTR-1 and pay it in GSTR-3B that month, even if your buyer has 60 days to pay. If you have extended credit periods across many clients, you may consistently be paying GST out of your own pocket weeks before receiving payment.

Your accounts receivable builds up. Every unpaid invoice within its credit period sits as accounts receivable on your books. If multiple clients delay or default, your receivable pile grows and your cash shrinks.

Late payment cascades. If your buyer delays payment beyond the credit period, your ability to pay your own suppliers on time is affected. This is why the MSME 45-day rule was introduced, to break the chain of delayed payments across the supply chain.

How to set the right credit period for your business

The right credit period depends on your industry, your buyer's payment capacity, and your own cash flow needs. Here are practical guidelines for Indian small businesses:

• Freelancers and service providers: Keep credit periods short. Net 15 or Net 30 is standard. Avoid Net 60 or longer unless the client is a large, reliable organisation with a strong payment history.
• Traders and manufacturers: Net 30 is the most common. If you are supplying to retailers or distributors, Net 45 is acceptable but be aware of the MSME rule if you are registered.
• First-time buyers: Consider asking for 50% advance payment and Net 15 for the balance rather than giving a full credit period to an unknown buyer.
• Government contracts: Payment cycles from government departments often exceed 60 days in practice. Factor this into your cash flow projections.

Common credit period mistakes Indian businesses make

• Not writing the credit period on the invoice. If no payment terms are mentioned on the invoice, the buyer may assume there is no due date and delay indefinitely. Always write the specific due date on every invoice, such as "Payment due by 31st May 2026," rather than relying on abbreviations like "Net 30."

• Extending credit to buyers without checking their MSME status. If you are a large enterprise and your supplier is MSME-registered, you must not agree to a credit period of more than 45 days. Doing so and then paying late triggers a tax deduction disallowance and compound interest liability.

• Confusing credit period with GST payment timing. Many small business owners believe they only need to pay GST after they receive payment from their buyer. This is incorrect. GST must be paid in the month the invoice is raised, regardless of the credit period or when actual payment arrives.

• Not charging interest on overdue accounts. If your credit period has expired and the buyer has not paid, you are entitled to charge late payment interest if it is mentioned in your agreement. Many small businesses do not enforce this and quietly absorb the cost of delayed payments.

Frequently asked questions

What is a credit period on an invoice?

A credit period is the number of days a seller gives a buyer to pay an invoice after goods are delivered or services are completed. For example, "Net 30" means the buyer has 30 days from the invoice date to make payment. Credit periods are agreed between buyer and seller and must be clearly stated on the invoice.

What is the maximum credit period for MSME suppliers in India?

Under Section 43B(h) of the Income Tax Act, effective from 1st April 2024, buyers must pay Micro and Small Enterprise suppliers within 45 days if a written agreement exists, or within 15 days if no agreement exists. Exceeding these limits means the buyer loses the tax deduction for that expense until the payment is actually made.

Does the credit period affect when I pay GST?

No. GST liability arises at the time of supply, which is when the invoice is raised or when the goods are delivered, whichever is earlier. You must report and pay GST in the month of supply regardless of the credit period given to your buyer. Even if your buyer has 60 days to pay, your GST is due in the same month you raised the invoice.

What happens if a buyer does not pay within the credit period?

The invoice becomes overdue. If you have a late payment clause in your agreement, you can charge interest on the overdue amount. If your buyer is a business that owes money to you as an MSME-registered supplier, they face compound interest at three times the RBI bank rate and cannot claim the expense as a tax deduction until they pay.

What is the difference between a credit period and payment terms?

These terms are used interchangeably in most business contexts. Payment terms refer to all the conditions around payment, including the credit period, any early payment discounts, and what happens on default. The credit period is specifically the number of days allowed for payment.

Related terms

Invoice · Accounts Receivable · Payment Terms · Net 30 · Advance Payment · Due Date · Late Payment Fee

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