MSME Classification Explained: Definition, Benefits & Key Features

Micro, Small, and Medium Enterprises (MSMEs) are the backbone of India’s economy. They generate employment, promote innovation, and support economic growth, especially in rural and semi-urban areas. To support these businesses better, the government has created a clear framework for MSME classification.

Understanding this classification is important for business owners. It helps determine eligibility for various schemes, benefits, and funding opportunities.

MSME Schemes in India: What You Should Know

The Indian government has introduced several initiatives to promote MSMEs. These schemes aim to provide financial support, training, easier access to credit, technology upgrades, and market access. But to benefit from these schemes, businesses must be registered and correctly classified as an MSME.

That’s why knowing your MSME category, whether micro, small, or medium, is crucial. This MSME categorisation determines what benefits your business is eligible for under government support systems.

Key Features and Benefits of MSME Categorisation

Registering your enterprise under the MSME category comes with a wide range of advantages. Here are some major features and benefits that make classification valuable:

• Priority Sector Lending
  MSMEs are often given priority in credit lending by financial institutions, which improves access to business loans.
• Subsidies and Incentives 
  Businesses can benefit from subsidies for technology upgradation, quality certification, and patent registration.
• Protection Against Delayed Payments 
  MSME-registered businesses are legally protected against delayed payments from buyers.
• Participation in Government Tenders 
  Many government tenders are reserved for MSMEs, offering better market opportunities.
• Lower Interest Rates and Easier Loan Approvals 
  MSMEs may receive favourable loan terms, including lower interest rates and simplified processes.

These benefits are available only when a business falls under the proper classification of micro, small, and medium enterprises, based on government-defined criteria.

Earlier MSME Classification: What It Looked Like

Before 2020, MSME classification was based only on the investment made in plant and machinery (for manufacturing) or equipment (for services). The definitions were different for the manufacturing and service sectors.

Here’s how the old MSME categorisation worked:

For Manufacturing Enterprises:

• Micro: Investment up to ₹25 lakh
• Small: Investment between ₹25 lakh and ₹5 crore
• Medium: Investment between ₹5 crore and ₹10 crore

For Service Enterprises:

• Micro: Investment up to ₹10 lakh
• Small: Investment between ₹10 lakh and ₹2 crore
• Medium: Investment between ₹2 crore and ₹5 crore

This old system had two major limitations:

• It separated manufacturing and services, which caused confusion.
• It didn’t consider sales turnover, which is a major factor in today’s business performance.

Revised MSME Classification: The New System Explained

To make the process more inclusive and practical, the government introduced a revised MSME classification on 1st July 2020. This new system brought two major changes:

• It combined manufacturing and service sectors under the same criteria.
• It introduced annual turnover as an additional parameter, along with investment.

Here’s the current MSME categorisation as per the revised classification:

Key Highlights of the Revised MSME Classification:

• The new classification uses both investment and turnover to define a business.
• It applies equally to manufacturers and service providers, simplifying the categorisation.
• Businesses can easily update or change their classification based on growth.

This new system offers better clarity and allows more businesses to benefit from government schemes.

Why MSME Classification Matters for Your Business

Knowing your MSME category isn’t just about registration, it can directly impact your business growth. Here’s why it matters:

• Easy Access to Credit: Classification can help you become eligible for collateral-free or low-interest loans.
• Legal Protection: Registered MSMEs are legally safeguarded against delayed payments from buyers.
• Tax and Tender Benefits: Businesses get advantages in public procurement and tax-related rebates.
• Recognition and Visibility: MSME registration gives your business more credibility, especially when dealing with large companies or government bodies.

Whether you're a small startup or an established medium-sized enterprise, understanding the classification of micro small and medium enterprises helps you plan better and make use of the support available.

Final Thoughts

The MSME classification system in India has been designed to support and encourage small businesses. With the revised system now in place, it’s easier for entrepreneurs to identify their category and apply for government benefits.

As a business owner, make sure you stay updated on your business’s investment and turnover figures. This will help you maintain the correct MSME categorisation and benefit from the various schemes and policies aimed at empowering India’s small businesses.