GST on Interest Income: Tax Rates and Exemption

Interest income is present in all financial transactions, and tax professionals often ask whether it attracts GST. Under GST law, most ordinary interest receipts from loans, deposits, etc. are exempt, effectively making the GST rate on such interest zero. However, specific categories of interest, such as credit‐card interest or penalties for late payment, fall out of this exemption and are taxable at the standard rate, usually 18%. 

Concept of Interest Income under GST

“Interest” is the consideration charged for the use of money. Under GST, “money” itself is neither a good nor a service as per Section 2(75) of CGST Act 2017, but the use of money can be a service. In general, giving a loan or taking a deposit is not a taxable supply. However, the consideration for that use, i.e. the interest charged, normally counts as a financial service. The GST Act therefore treats interest earnings as part of financial services. In practice though, GST law exempts interest on loans/deposits via notification, as discussed below.

GST Rate on Interest Income

Since most interest is exempt, there is no GST charge on it. Formally, Notification No.12/2017-Central Tax Rate and IGST Notification 9/2017 set the effective rate at Nil for interest on loans and deposits. If interest were not exempt, the normal GST rate would be 18% under the financial services heading. In practice:

• Exempt interest: Subject to no GST.
• Taxable interest: Taxed at 18% (IGST/CGST+SGST) as part of the supply value.

Exemptions for Interest Income under GST

The GST law provides explicit exemptions for interest income:

• Notification Exemption (Entry 27/12-2017 and 28/9-2017): These entries exempt “services by way of extending deposits, loans or advances insofar as the consideration is represented by way of interest or discount”. Thus, ordinary loan or deposit interest is exempt. An Advance Ruling confirmed that inter-company loan interest falls under this exemption.
• Schedule III (No Supply): Certain banking services are not supplies at all. For instance, “services provided by a banking company to account holders” including interest on deposit accounts, are out of GST scope. In practice, this means a bank paying interest on savings/deposits is not providing a taxable service. 

Exempt vs. Taxable Components of Interest Income

To clarify, not all payments related to money are exempt:

• Exempt Components: Any pure interest payment on a loan or deposit is exempt. For example, a manufacturer lending ₹1,00,000 to a subsidiary at 10% interest per annum would receive ₹10,000 interest exempt from GST. Similarly, interest received by a bank on a term loan is exempt under the same notification.
• Taxable Components: Charges that look like interest but are not covered by the exemption must be taxed. For instance, credit-card finance charges are specifically excluded from the exemption. Thus, credit-card interest is taxed at 18%. 

In short, pure loan interest = exempt; incidental charges = taxable.

GST on Interest in Specific Contexts

• Loans and Advances: Interest received on ordinary loans or advances to third parties or related parties is exempt by Notification 12/2017. This holds whether the parties are associated or not. An advance ruling on inter-corporate loans confirmed that the lending company owes no GST on the interest received. Thus, business or personal loans generate exempt interest income.
• Overdue Payments (Penal Charges): The AAR and AAAR have held that penal interest on loan defaults or delayed EMIs is subject to GST as a supply. However, on Jan 28, 2025, CBIC issued a clarification stating that no GST is payable on penal charges by banks/NBFCs levied under RBI’s new guidelines. This circular explains that “penal charges” (liquidated damages for breach of contract) are not consideration for a supply, so GST is not leviable. 
• Inter-company Borrowings: The same rules as above apply. If one company lends to another, the interest is a service by way of a loan, and notification exemption applies. Nothing extra is due. The threshold for GST registration includes exempt supplies, but the tax is not charged on that interest itself.
• Interest Income of Banks and NBFCs: Banks and NBFCs routinely earn interest on loans given and pay interest on deposits. All such interest falls under the loan exemption or Schedule III. A bank’s loan interest income is exempt. A bank’s deposit interest expense is not a supply by the bank. In fact, the GST law’s Schedule III effectively excludes banking services to account holders from supply. 
• EMIs and Hire-Purchase: In a hire-purchase sale or when buying via EMIs, the supplier effectively finances the sale. GST guidance clarifies that if the interest component is separately invoiced, GST is not charged on it. If not separately broken out, the interest is deemed part of the taxable price of goods/services. For credit-card EMI loans, courts have held that interest must be charged with GST unless it is truly a separate loan contract.