The MSME Classification
Chapter Twelve
Syllabus topic 4, "Business Registration under UDYAM / UDYOG AADHAR."
Pages 24 to 26 of 80
Where the rule is
Not in the MSMED Act. Section 7(1) of the Micro, Small and Medium Enterprises Development Act, 2006 empowers the Central Government to classify by notification, and the notification is where the numbers are.
S.O. 2119(E), dated 26 June 2020, made under section 7(1) read with section 7(9) and section 8(2) read with section 8(3), created Udyam registration and set the classification, in supersession of four earlier notifications.
S.O. 1364(E), dated 21 March 2025, amended paragraph 1 of it, with effect from 1 April 2025.
Both are Gazette notifications and both are quoted here from the Gazette.
The limits now in force
Paragraph 1 of S.O. 2119(E), as amended:
An enterprise shall be classified as a micro, small or medium enterprise on the basis of the following criteria, namely:-
(i) a micro enterprise, where the investment in plant and machinery or equipment does not exceed two crore and fifty lakh rupees and turnover does not exceed ten crore rupees;
(ii) a small enterprise, where the investment in plant and machinery or equipment does not exceed twenty five crore rupees and turnover does not exceed one hundred crore rupees; and
(iii) a medium enterprise, where the investment in plant and machinery or equipment does not exceed one hundred twenty five crore rupees and turnover does not exceed five hundred crore rupees.
| Category | Investment does not exceed | Turnover does not exceed |
|---|---|---|
| Micro | Rs. 2.5 crore | Rs. 10 crore |
| Small | Rs. 25 crore | Rs. 100 crore |
| Medium | Rs. 125 crore | Rs. 500 crore |
What the limits were before 1 April 2025
Worth knowing, because a question may be set on either and because the change is recent.
| Category | Investment, old | Investment, new | Turnover, old | Turnover, new |
|---|---|---|---|---|
| Micro | Rs. 1 crore | Rs. 2.5 crore | Rs. 5 crore | Rs. 10 crore |
| Small | Rs. 10 crore | Rs. 25 crore | Rs. 50 crore | Rs. 100 crore |
| Medium | Rs. 50 crore | Rs. 125 crore | Rs. 250 crore | Rs. 500 crore |
S.O. 1364(E) did nothing but substitute those six figures, and it did so by substituting words: "one crore" became "two crore and fifty lakh", "five crore" became "ten crore", and so on. Everything else in S.O. 2119(E) stands as it was.
The composite criterion, and the rule that goes with it
Paragraph 3 of S.O. 2119(E):
(1) A composite criterion of investment and turnover shall apply for classification of an enterprise as micro, small or medium.
(2) If an enterprise crosses the ceiling limits specified for its present category in either of the two criteria of investment or turnover, it will cease to exist in that category and be placed in the next higher category but no enterprise shall be placed in the lower category unless it goes below the ceiling limits specified for its present category in both the criteria of investment as well as turnover.
(3) All units with Goods and Services Tax Identification Number (GSTIN) listed against the same Permanent Account Number (PAN) shall be collectively treated as one enterprise and the turnover and investment figures for all of such entities shall be seen together and only the aggregate values will be considered for deciding the category as micro, small or medium enterprise.
The MSME Classification
Three rules, and the second is the one that is examined.
Going up is easy: either criterion is enough. Cross the investment ceiling or the turnover ceiling and the enterprise moves up a category.
Coming down is hard: both criteria must fall. An enterprise does not return to a lower category until investment and turnover are both below the lower category's ceilings.
That asymmetry is deliberate. It stops an enterprise flickering between categories on one bad year, and it stops it manipulating one figure to get back into a category with better benefits.
Worked, four cases
Apply the limits in force from 1 April 2025.
| Investment Rs. cr | Turnover Rs. cr | Category | Why | |
|---|---|---|---|---|
| A | 1.80 | 6.40 | Micro | Both under 2.5 and 10 |
| B | 1.90 | 14.00 | Small | Turnover crosses the micro ceiling of 10, so it moves up on that criterion alone |
| C | 30.00 | 40.00 | Medium | Investment crosses the small ceiling of 25 |
| D | 22.00 | 90.00 | Small | Both within 25 and 100 |
And the coming-down rule. Enterprise B, now small, has a poor year: investment Rs. 1.90 crore and turnover Rs. 8.20 crore. Both are now under the micro ceilings of 2.5 and 10, so it returns to micro. Had only the turnover fallen, it would have stayed small.
How investment is computed
Paragraph 4 of S.O. 2119(E):
- Linked to the income-tax return of the previous years.
- For a new enterprise with no return yet, on the promoter's self-declaration, and that relaxation ends after the 31st March of the financial year in which it files its first return.
- "Plant and machinery or equipment" takes its meaning from the Income Tax Rules 1962 and includes all tangible assets other than land and building, furniture and fittings.
- The purchase invoice value is taken, first hand or second hand, excluding GST, where the enterprise is new and has no return.
- The items excluded by Explanation I to section 7(1) of the Act are excluded, which are the cost of pollution control, research and development, industrial safety devices and such other items as may be specified.
How turnover is computed
Paragraph 5:
- Exports of goods or services or both are excluded from turnover for classification. This is a deliberate encouragement to export: an exporting enterprise stays in a lower category longer.
- The figures are linked to the Income Tax Act or the CGST Act and the GSTIN.
- Turnover of an enterprise without a PAN was taken on self-declaration only up to 31 March 2021, and PAN and GSTIN have been mandatory since.
The MSME Classification
The three numbers to carry into the exam
Micro: 2.5 and 10. Small: 25 and 100. Medium: 125 and 500. In crores, investment first, turnover second, in force from 1 April 2025, under S.O. 2119(E) as amended by S.O. 1364(E).
The rest of this subject
These notes are cut from the University's printed syllabus. Open the syllabus itself, or the past papers, for the same subject.