What’s MSME?
MSMEs stands for Micro, Small, and Medium Enterprises. MSME Development Act, 2006 is the principal legislation governing MEMEs in India. This law governs the registration, development, promotion and regulation of MSME sector in India.
Form of business:
MSME business form can be sole proprietorship or partnership firm or LLP or private limited company. Like any business entity, MSMEs must have a Valid PAN, GST registration (if applicable) and business registration certificate from MCA (for Pvt Ltd and LLP), from Registrar of firms (for Partnership firm) or from local municipal corporation (For sole proprietorship).
Classification:
This system of classification of enterprises into Micro, Small and Medium, was first introduced in 2006.
Initially, Section 7 of the Act provides the criteria for classification based on Investment in plant and machinery or equipment. Subsequently in June 26, 2020 composite criteria was introduced —considering both investment and turnover for classification.
In Budget 2025, significantly increased the thresholds for investment and turnover. Corresponding notification S.O. 1364(E) was issued by the Ministry of MSME on 21st March 2025, with revision taking effect from April 01 2025.
| Category | Investment Limit | Turnover Limit |
|---|---|---|
| Micro | ≤ ₹2.5 crore | ≤ ₹10 crore |
| Small | ≤ ₹25 crore | ≤ ₹100 crore |
| Medium | ≤ ₹125 crore | ≤ ₹500 crore |
Calculation of turnover and investment
- Turnover for the purpose of determining the classification is : Turnover of previous financial year.
- Turnover information is linked to 2 statutory records: Income Tax Act, GSTIN data. Accordingly, turnover for this purpose is calculated based on GST returns (like GSTR-1 and GSTR-3B) and Income Tax filings.
- Export turnover ( whether its of goods or services) are excluded when computing turnover for MSME classification.
- For the purpose of determining Investment in plant and machinery or equipment: WDV as at end of previous financial year (according to Income tax return filed) is considered for this purpose.
- As far as newly formed business is concerned, classification is based solely on investment. Turnover criteria is applicable to them only after the first ITR filing. For the first year, promoter of the enterprise shall self-declare investment figures.
- All units with GSTIN listed against the same Permanent Account Number (PAN) shall be collectively treated as one only the aggregate values will be considered for deciding the category as micro, small or medium enterprise.
Rules for Classification
Initial Classification:
The initial classification for the purpose of MSME refers to the first-time categorization of a business as a Micro, Small, or Medium Enterprise under the MSME framework. This classification is typically done during Udyam Registration, which is the official portal for MSME registration in India.
The Initial classification is based on Composite criteria, meaning both investment and turnover are considered and the business is classified in a category based on the lower of the two values.
Trigger for Category Change
Upward Reclassification: If an enterprise crosses the threshold (either investment or turnover after classification) during a financial year, it does not immediately move to the higher category. Instead, the reclassification takes effect from the next financial year—starting April 1st of the following year
Even after reclassification, the enterprise can continue to enjoy non-tax benefits of its previous category for three years from the date of upward change.
Downward Reclassification — Stricter Rule: To move down to a lower category, the enterprise must fall below both investment and turnover limits of that category. Even then, it wont be re-classified immediately. The change shall take effect only from the start of next financial year.
Coming to Udyam Registration:
The Udyam Portal is the official government platform launched by the Ministry of Micro, Small and Medium Enterprises (MSME) in India for registering MSMEs digitally. It’s not legally mandatory for all MSMEs to register under Udyam. However, it is highly recommended because registration unlocks a wide range of government benefits, financial support, and legal protections.
Registration details: Self-declaration using Aadhaar, PAN, and GSTIN (if applicable). Registration is free of cost. On registration, an enterprise will be assigned a permanent identity number to be known as ―Udyam Registration Number and a e-certificate namely ―Udyam Registration Certificate.
Once registered, the certificate is valid for the lifetime of the enterprise, provided it continues to meet MSME criteria. Annually, MSMEs must update their ITR and GSTR details to maintain the classification and benefits.
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