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Published on:

September 27, 2024

Alankar Mishra

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Basics of GST

Know About GST on Interest Income

Earnings by way of interest income are considered passive income and are obtained by individuals, corporations, or financial institutions. Since the introduction of the Goods and Services Tax (GST) regime, it has become essential to understand GST on interest income for taxation purposes.

Generally, businesses categorize interest income as exempt from GST; however, there are certain exceptions where GST on interest income may apply, especially for businesses providing financial services. Understanding these nuances is important for ensuring proper compliance under the GST framework.

We’d look at the applicability of interest income earned and the tax on goods and services rendered on such income of interest, and the conditions which would require such a tax to be levied on interest income.

What is Interest Income?

The income that a person gets from lending money or earning through investing in money lending facilities such as saving accounts, fixed deposits, bonds, loans or advances is called interest income. For business entities, it may also come from making sales on credit to customers or providing loans or related services.

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Interest income is usually passive income for both people and businesses. The GST regime is adopted and used by business enterprises for every range of financial transactions. Though it is accustomed to transaction, income or return expressed in terms of interest forms one aspect of the business.

GST on Interest Income: Exemptions and Applicability

According to the provisions of the GST Act, certain categories of interest income are out of the scope of GST. This is primarily due to the fact. That interest income does not classify under the given definition of supply of goods or services in most cases. Hence, it attracts no taxation under the GST regime.

Exemption for Interest on Loans, Advances, and Deposits

However, regarding the income followed from the loans, advances, or deposits, Goods and Services Tax is not applicable as per Notification No. 12/2017-Central Tax (Rate) dated June 28, 2017. This applies to:

Interest on loans provided by individuals or organizations.

The interest earned on any fixed deposit or savings deposit with a bank or any financial institution.

The interest on the advances or the amount provided by the business or individuals.

This concession is available for an individual as well as an organization subject to the fact the interest income does not arise from the supply of goods or services but rather from the legitimate term lending.

Interest on Credit Sales

Another method includes charging interest on credit sales and payment collection. However, interest on loans and advances is not liable to GST. But, oui, interest on sales of goods or services on credit is governed by the provisions of GST. When there is a credit facility which is extended to the customers meaning the business would further provide the goods and allow the customers a certain period within which they would pay for the goods, the interest due on such a delayed payment is part of the transaction value and hence taxable.

For example:

The businessman extends supplies of goods worth ₹1,00,000 on credit and collects 12% on account of lateness in making payment for the debt. The interest component is taxable under Goods and Services Tax (GST), whereby the goods and services tax will be attached to both the main amount of the loan of Rs 1,00,000 and the interest.

Interest on Credit Card Payments

Another source of income to banks or financial institutions comes from the use of credit cards by their clients and charging interest on payments that take more than a month. Such interest on overdue bills chargeable by the banks would also fall within the GST clean energy credit. Such tax, however, on credit card dues, is only payable if an individual pussy-toed the taxes owed on sales.

Key Scenarios Where GST on Interest is Applicable

In coalescence with the above norms, it should be noted that in countries that practice GST, there are also various circumstances in which GST on the interest is applicable. These include circumstances such as:

Interest on Credit Sales or Delayed Payments

Invoice discounts will be provided for the sale of goods or services if they are not paid for purchased on credit. In this case, such interest will also be charged on peak interest that covers goods and services and other activities subject to taxation.

Interest on Credit Card Outstanding

In the performance of these services, there are expenses involved with the credit management of customers. Due to the nature of such dollar things, the interest is made to be an additional income and thus the income should attract tax under the Capital Gains Taxes.

Hire Purchase and Leasing Transactions

Such transactions often include lease purchases where the person paying the instalments pays rent and part of the sale price in the same instalments. Under the provisions of Section 165132 of the GST Act, ownership has extended to the institute that issues the hire purchase credit block.

How to Handle GST on Interest Income in GSTR-1

All businesses filing a GSTR-1 return must declare the interest embodied in the goods and services tax, with some exceptions. Here is how to handle interest income in GSTR-1.

‍Exempt Interest Income: Any interest on income that is exempt under GST, such as interest on loans or deposits, should be entered in GSTR-1 in the fields Exempted or Nil rated respectively.

‍Taxable Interest Income: If an individual or business has earned interest income that comes under the levy of GST aside from the money deposited in a fixed calclaf i.e., interest on credit sales or payments which were met via credit cards, then reporting for that has to be made under the taxable supply section and indicating the GST rate applicable.

Interest Income In Composite And Mixed Supplies

In some cases, companies provide blended services that have some parts taxable and some exempt from tax. Since interest is earned in a composite or mixed supply, GST treatment has a few variations:

‍Composite Supply: Where the interest income constitutes a component of a composite supply such as a mortgage i.e. one where two or more supplies are naturally bundled with one being a principal supply, then the GST treatment would adopt the main supply. For example, in the case of a loan, if the main supply rendered is of a financial exclusion, interest earned will be subjected to that exclusion.

‍Mixed Supply: When the interest earned is in a mixed supply where other separate irrevocable unilateral supplies exist, other than earning interest, then the provisions of GST will depend on which type of supply is made. For instance, if there is a principal supply of a service that is taxable and interest is charged on it, the tax charges will only be on the legal services engaged.

‍Input Tax Credit (ITC) on Interest Income

Since the interest income is an exempt income what needs to be answered is whether Input Tax Credit (ITC) can be claimed concerning the expenses one incurs in making such income. This is how inland revenue relates to the Income relating to interest:

‍No ITC on Exempt Income: Business entities don’t have to claim ITC for goods and services accounted in earning such exempt income as interest income from loans or fixed deposits. Yes, the term embodies the application under provisions which restrict the claiming of ITC on Inputs related to exempt supplies.

‍ITC on Taxable Interest: Business which earns certain types of interest income such as interest on sales made on account and credit card payments which is taxable income could deduct the ITC incurred on availing taxable supplies.

GST on Interest Income for Financial Institutions

Interest income is a primary source of income for banks, non-banking financial companies (NBFCs) and other financial institutions. Let’s see the implications of GST for financial institutions as it relates to interest income:

‍Interest on Loans and Deposits: Interest from loans made to customers or deposits or advances made by banks and other financial intermediaries is a GST-free supply.

‍Service charges and processing fees: Since interest income earns an exemption, these words are also used to express chargeable fees on the loans. They are subjected to taxes under the GST and attract the standard GST rate.

‍Credit card interest: Again when the credit card has an outstanding amount, interest, which is charged on this, attracts GST. When financial institutions are filing their GST returns this has to be recognized.

Exemptions and Exceptions for GST on Fixed Deposits

There are several exemptions and exceptions to GST on VAT, some of which include the following:

‍Loans and Advances: As per Notification No. 12/2017-Central Tax (Rate), loans and advances are also exempt from GST. This covers loans given by private individuals, banks, NBFCs, and other financial institutions.

‍Deposits and Savings A/C: Income from Interest on fixed deposits (FD) or savings accounts are kept out of the purview of GST.

‍Interest on inter-corporate Deposits: Interest paid by A to B for inter-corporate deposits where C is merely investing and the return is purely for financial return shall not be subject to GST.

‍Conclusion

How businesses and individuals compute GST on interest income is important. The importance of GST in economic undertakings cannot be overemphasized. Most interest income, that is from loans, advances, deposits, etc. is not chargeable with GST. However, certain types of interest such as those arising from credit sales and those from delayed payments are subject to GST. There is a need to properly classify income from interest and report it elsewhere i.e. in the GST returns to avoid contravening the tax laws.

There is always a likelihood of non-compliance with regulatory frameworks when businesses do not review their transactions in the cause of business to assess the taxability of interest income, account correctly for exempt income, and distinguish tax from tax-exempt income to minimize risk.

FAQs

1. Is interest income taxable under GST?

No, interest income under GST is generally exempt from taxation. Interest earned from financial institutions, loans, or deposits is categorized as a financial service and does not attract GST, as it falls under the exempted category.

2. Is GST applicable on interest income in any case?

For most cases, GST is not applicable on interest income earned from deposits, loans, or advances. However, if the interest is part of a composite supply where other taxable services are involved, then GST might apply to the taxable portion of the service.

3. What is the HSN code for interest income?

HSN code for interest income falls under the category of "financial services," and typically, it is covered under HSN Code 9971. Since interest income is exempt from GST, there is no specific tax rate applicable to this HSN code.

4. What type of interest income is exempt under GST?

Interest income from loans, advances, and deposits with banks or financial institutions is exempt under GST. This exemption ensures that interest income under GST does not attract any tax liability for individuals or businesses.