Claiming Interest in Construction Disputes: Interest Rates Currently and Legal Provisions

Theme: Project Closure; Module: Claims & Disputes

Author: Dr. Pradeep Reddy Sarvareddy

Published Date: 03 Jan 2026

Recovering the principal amount in a construction dispute is often only half the battle. Delayed payments erode the value of money due to the time involved based on various factors like inflation and finance costs. Yet, Interest related Claims are frequently overlooked and not properly presented either in Arbitration or Courts. This Article examines the current Interest Rates, compares various aspects of Interests, laws related to Interest and taxation, in relation to construction disputes involving Government Departments and MSME.

Current Interest Rates

Rates applicable to the Contractor

Income Tax Act

Late tax payment = 12% per annum

GST

Late payment = 18% per annum

Wrong Input Tax Credit = 24% per annum

TDS (Tax Deducted at Source)

Late deduction = 12% per annum

Late deposit = 18% per annum

Refund from Department

Income Tax Act

Delayed refund = 6% per annum

GST

Refund delay = 6% or 9% per annum

Exceptional Interest Rates

High rates (even 50% to 60%) are allowed for RBI-regulated financial entities

Interest Rates as per various situations

MSMED Act

Delayed payment to MSMEs = 3× RBI Bank Rate = 19.5%, compounded monthly

Effective annual rate = 21.4%

(Note that here we use the RBI Bank Rate not the RBI Repo Rate)

Arbitration Act

Post-award interest = Current bank rate + 2% = 6.5% + 2% = 8.5%

Commercial Lending Rates

Typically 15% to 18%, depending on credit profile

Typical Interest Rate by Court

Currently about 6% to 9%

Summary

You may notice that when you have to pay the Tax Department, the Interest Rates are high. But if you are to receive amount from the Tax Department, the Interest Rates are low. Also, notice that you may have to borrow at commercial lending rates, but if you go to Arbitration or Courts for your disputes, you may end up with significantly lower Interest Rates. This is a prevailing situation in India, and it may take some more time before everyone is on the same and equal footing. It cannot be that if you default you pay less, but if I default I pay more. This is inequality. Until we abolish this inequality, we are what we are.

However, if you can prove your case very strongly, there are cases where Courts and Arbitrators have allowed higher rates. Submit your case with sufficient data to provide for higher interest rates for your claims.

Then, hope for the best.

Statutes related to Interest

Interest Act, 1978

This is one of the most relied upon Statute by Courts.
This Statute comes into play only where your Contract does not include any rate or mechanism to calculate Interest.
Courts, tribunals, and arbitrators can award interest up to the “current rate” as per this Statute, which is defined as the highest deposit rate of scheduled banks as per RBI directions from time to time.
This Statute applies to pre-suit periods (ante litem) and pendente lite interest if not otherwise agreed in the Contract provisions.
This Statute does not impose a fixed cap as it ties to RBI’s benchmark deposit rates (currently = 6.5%), which is supposed to be applicable to the current situation.
But what if your case is older and the RBI rates themselves were more at that time?

Usurious Loans Act 1918

This Act is not known to many.
This Act is to prevent enforcement of harsh or unconscionable loans with exorbitant interest which are present in the Contract. So, even if your Contract says something that appears unreasonably high, you can rely upon this Act to save yourself.
Remember that Courts have powers and can reopen transactions if Interest levied upon you is excessive and the financial Transaction is substantially unfair.
Again, this Act also does not include any fixed numeric cap, i.e., there is no number or interest rate which is stated to be unfair. So, Courts assess fairness case-by-case basis.
This Act applies mainly to private moneylenders that are not RBI-regulated banks/NBFCs or others. But the law keeps changing, so look out.
Also know that some states in India also have Moneylenders Acts with upper limits of Interest, and the state law may overwrite this Usurious Loans Act.

RBI Regulations

All the Banks and NBFCs that are under RBI are not bound by state upper limit for interest rates.
The Banks and NBFCs under RBI operate in a different regime of rules and regulations.
Supreme Court has clarified that Banks can charge interest more than 30% per annum on pending credit cards dues. Before these Judgements by the Supreme Court, the Consumer Courts used to limit the high interest Rates by ignoring the Contracts, which the Supreme Court found to be wrong in certain situations.
Beware that Credit cards can charge 3% to 4% interest per month, which, if compounded becomes 40% to 55% annually. In several cases, Courts have upheld this high interest rate as legal because it’s contractual and RBI-regulated, and it applies for delayed payments, which are unsecured. Note the minor variations.
Fintech, i.e., Financial & Technology based Lenders or Digital lenders provide loans through Apps. Some of these lenders charge 50% to 60% effective annual interest rates on short-term unsecured loans. RBI has warned such lenders against “usurious” practices but has not imposed a hard cap or upper limit. Instead, RBI mandates transparency and board-approved ceilings of upper limit. This means that the Interest Rate should be informed to you clearly, but not buried in some document.

MSMED Act

Currently about 21.4% p.a.
More details about this Act will be shared in a different Article

Arbitration Act

Currently about 8.5% p.a.
More details about this Act will be shared in a different Article

Interest Periods in Legal Disputes

In legal disputes, there are usually three-stages of Interest.

Stage 1: Ante litem (or Ante lite) interest

Before litigation or arbitration begins

From cause of action to filing of claim

Stage 2: Pendente lite interest

During the pendency of proceedings

From filing to award or judgment

Stage 3: Post lite or Post-award interest

After award or judgment until payment

Statutory mandate under Arbitration Act and Civil Procedure Code.

Contract says “No Interest”. Then what?

Contracts can bar interest for pre-reference (Ante lite) and pendente lite periods
Clear drafting is essential to bar such interest. But without proper clauses, you cannot bar all forms of interest
Exception: Post-award interest under Arbitration Act usually applies unless the award directs otherwise. So even if your Contract bars interest, you will still be entitled to Post-Award interest.

Type of Interest:

Interest is usually of two types as follows:

Simple Interest

Default under Civil Procedure Code and Arbitration Act

Courts generally award simple interest unless contract specifies otherwise

Compound Interest

Mandatory under MSMED Act (monthly rests)

Arbitration Act creates a “compounding effect” by applying post-award interest on the entire sum (including pre-award interest)

Note: Your prayer for Interest should be clear, separately for each period. Courts cannot provide you that what you don’t ask.

Are you entitled to Today’s Interest Rate or Historical Interest Rate?

Usually, Courts often apply current rates uniformly, even for breaches that are decades old.
This simplifies adjudication process but ignores inflation effect.
The result is that the Claimants lose real value over time.
This is one reason that many Respondents / Defendants are happy to prolong the cases, due to the lower current interest rates.

Note: Provide your claims clearly so that Courts would be compelled to provide you historical interest rate which you actually incurred.