Taxation of Interest Income under GST: What You Should Know
Many people assume that bank interest has nothing to do with GST. While interest is generally exempt, there are critical points regarding registration thresholds and Input Tax Credit (ITC) that every professional must grasp.
1. Interest Income Is Generally Exempt
Under Notification No. 12/2017 – Central Tax (Rate), services related to deposits, loans, or advances are exempt when the income is interest. This includes:
- Fixed Deposits (FDs) & Recurring Deposits (RDs)
- Savings Account Interest
- Interest on loans given to others
- Post Office savings schemes
2. The Exception: Credit Card Interest
The exemption does not apply to credit card services. GST (usually at 18%) is applicable on:
- Outstanding credit card balances
- Late payment charges or overdue amounts
3. The GST Registration Trap
Even though interest is exempt, it is part of your Aggregate Turnover. This can push you over the registration limit unexpectedly.
FD Interest: ₹3 Lakhs
Total Aggregate Turnover: ₹21 Lakhs
Result: If your threshold is ₹20 Lakhs, you must register for GST even though your taxable work is below the limit.
4. Relief on Input Tax Credit (ITC)
Usually, if you have exempt income, you must reverse a portion of your ITC (Rule 42/43). However, for ordinary businesses, interest income is excluded from the exempt supply value for ITC reversal purposes.
| Scenario | Ordinary Business | Banks/NBFCs |
|---|---|---|
| Earned FD Interest | No ITC Reversal | Partial Reversal Required |
| Registration Count | Included in Turnover | Included in Turnover |
Final Takeaway
- Interest is exempt but counts toward your registration limit.
- Credit card interest is fully taxable.
- Normal businesses don't lose ITC because of bank interest.
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