GST on Security Deposit: Applicability, GST Rate and Examples

From ensuring rental payments for commercial properties to safeguards against mishandling of properties during leaseholds, security deposits play a vital role in businesses. Is GST applicable to the security deposit? Who is liable to pay the tax, and under what circumstances? 

This article discusses everything related to GST on security deposits for accurate accounting of tax liabilities, regulatory compliance, and avoiding penalties. 

What is GST on Security Deposit?

A security deposit is a monetary guarantee or collateral that one party in a contract pays to the other party at the initiation of the contract. Typically, tenants, parties receiving services, or leaseholders pay such deposits to property owners, service providers, or lessors. The primary purpose of paying such collateral is to cover against non-payment of dues, damages to property, or breaches of other terms stated in an underlying contract. 

Significant characteristics of security deposits:

• Not a direct part of a “consideration” for any supply of goods or services
• A recipient of a security deposit only holds the sum for a specific period and refunds the same upon fulfilment of contractual obligations. 
• Forfeiture of a part or the entire deposit is contingent upon events, pre-specified in the underlying contract. 

GST Applicability on Security Deposits

GST does not apply to security deposits at the time of initial payment if they are fully refundable. The reason is that it does not comprise a part of the actual payment for the supply of goods or services. Additionally, payment of the security deposit also does not necessarily ensure any 'furtherance of the business' for either party in the underlying contract. 

However, GST is payable on security deposits in the following cases: 

1. The deposit is explicitly non-refundable.  
2. A part or the entire portion is forfeited from an otherwise refundable deposit due to breach of contract. 
3. A part or the entire deposit is adjusted against “consideration” for the supply of goods or services. 

The tax applies only to the forfeited or adjusted amount and not to the refunded portion of the security deposit. Taxpayers can claim input tax credits for the GST paid from their tax liabilities originating from the commercial use of the underlying property, goods, or services. 

GST Rate on Security Deposits

GST is levied on the forfeited or adjusted amount at a rate corresponding to the underlying goods or services. So, if a security deposit is paid for renting a commercial space, any forfeiture of the deposit will attract GST at 18%. 

GST on Security Deposits Example

Assume ABC Ltd occupied a factory floor as a tenant from M/s XYZ Associates on a monthly rent of Rs 50,000. As part of the license agreement, ABC Ltd is required to pay 3 months of rent as a security deposit, which would be refunded at the end of the license period. The license period is for 11 months. 

At the end of 11 months, ABC Ltd vacated the floor as part of the agreement. However, during the tenancy period, damage was caused to the floor. It was mutually agreed that a sum would be deducted from the security deposit as the cost of repair. 

• M/s XYZ Associates charged Rs 20,000 from the security deposit as the cost of repairing the damaged floor. 
• An 18% GST was also charged on Rs 20,000, leading to a sum of Rs 3,600 as tax payable by the ABC Ltd. 
• The total amount to be adjusted from the security deposit would be (Rs 20,000+ Rs 3,600) or Rs 23,600. 
• The total refund from the security deposit would be (Rs 50,000 - Rs 23,600) or Rs 26,400.

GST on Security Deposits vs Advance Payments 

Advance payments are part of the consideration for supplies of goods or services and are not explicitly refundable. So, such payments are different from security deposits, and GST is payable on advance payments.