GST Exemptions in Banking

GST Exemptions in Banking: What Is Taxable, What Is Not, and Why It Matters for FY 2026-27

Under Indian GST law, most banking fee-based services attract 18% GST — but three broad categories sit outside this net entirely: interest on loans and deposits (exempt under Entry 27 of Notification No. 12/2017-Central Tax (Rate)), transactions in securities and money (excluded under Schedule III of the CGST Act 2017 as neither goods nor services), and a defined list of government-scheme and RBI-linked services notified by CBIC. Union Budget 2026 has retained this framework for FY 2026-27. Getting the classification right has direct cash consequences for both banks managing ITC and business customers claiming credit.

The Default Position: Banking Services Are Taxable at 18%

Before mapping the exemptions, fix the baseline. Under Section 9 of the CGST Act 2017, every supply of services is taxable unless specifically exempt or excluded. For banks, the taxable basket is large and often underappreciated by customers:

• Account maintenance charges (AMC on savings and current accounts)
• Fund transfer fees — NEFT, RTGS (UPI person-to-person transfers remain outside the net; more on this later)
• Demand draft and pay-order commissions
• Loan processing fees, administrative charges, and documentation fees
• Credit card annual fees, late payment charges, and overlimit fees
• Locker rental
• Demat account AMC and transaction charges where the bank acts as depository participant (DP)
• Forex conversion margin — the spread charged on currency conversion
• Merchant Discount Rate (MDR) on card transactions, subject to specific exclusions

Banks issue a tax invoice — or, for B2C supplies, a consolidated GST invoice — showing CGST + SGST (intra-state) or IGST (inter-state). The applicable SAC code is 9971 for financial services, with sub-codes for specific activities such as 997111 for central banking services and 997114 for general banking services.

Category 1: Outside GST Altogether — Schedule III Activities

Schedule III of the CGST Act 2017 lists activities that are neither supply of goods nor supply of services. These are not merely "exempt" — they are conceptually outside the GST net. No output tax. No GST in GSTR-1. No reversal obligation for the customer.

Interest on Loans, Deposits and Advances

Entry 27 of Notification No. 12/2017-Central Tax (Rate) exempts services by way of extending deposits, loans or advances in so far as the consideration is represented by way of interest or discount. There is one carved-out exception: interest involved in credit card services is taxable — that finance charge has a service character distinct from simple interest on money lent.

What this means in practice:

• A bank's interest income on home loans, personal loans, working-capital credit lines, overdraft facilities, and fixed deposits carries zero GST output liability.
• The borrower pays EMIs comprising principal + interest; only any separately identified processing fee or service charge component attracts GST.
• Penal interest charged on overdue loan accounts is generally treated as interest and remains outside the net — but only when it is genuinely consideration for the extended use of money over time. A flat "recovery management fee" or "bounce charge" labelled as interest will not survive scrutiny if it has a fixed, event-driven structure unrelated to the time value of money.

Transactions in Securities

Schedule III, Entry 6 of the CGST Act excludes actionable claims (other than lottery, betting and gambling) from the definition of goods. Securities — shares, debentures, bonds, government securities, mutual fund units — are not goods under GST law.

Buying, selling, or transferring securities does not constitute a "service" because no separately identifiable service is rendered; the transaction itself is the activity.

This means:

• A bank's own treasury portfolio activity — trading G-Secs, corporate bonds, equities — sits outside GST entirely.
• Brokerage fees and transaction charges levied on customers for facilitating these trades, however, are taxable at 18%. The underlying trade is outside GST; the service of executing it is not.

Pure Dealings in Money

Schedule III, Entry 1 excludes transactions in money. Converting one denomination of notes to another, for example, is outside GST. Foreign exchange conversion, by contrast, is treated as a service — the spread or margin on currency conversion is taxable under a special valuation rule prescribed in Rule 32(2) of the CGST Rules.

Category 2: Statutory Exemptions Under Notification 12/2017-CT(Rate)

CBIC has issued and periodically amended Notification No. 12/2017-Central Tax (Rate) (and its IGST counterpart, Notification No. 9/2017-IGST(Rate)), specifying services that are exempt from GST. The banking-relevant entries are as follows.

RBI Services and Agent Banks

Entry 26A: Services provided by the Reserve Bank of India to any person in the discharge of its statutory functions are fully exempt. This covers regulatory oversight, monetary policy transmission, and currency management functions the RBI performs under the Reserve Bank of India Act 1934.

Entry 26B: Services provided by a banking company acting as an agent of the RBI — specifically currency chest operations, issuance and management of bank notes and coins authorised under Section 17(1) of the RBI Act — are exempt. Banks that operate currency chests, distribute notes across branches, and manage soiled note destruction on the RBI's behalf are not required to charge GST on these agency services.

Government Welfare Disbursals

Banks acting as disbursing agents for government welfare payments under Direct Benefit Transfer (DBT) — MNREGA wages, PM Kisan instalments, scholarship disbursals — are exempt on that agency function when acting purely on behalf of the central or state government. The exemption applies to the service of authorising and facilitating the financial transaction; the bank earns no commission on most DBT mandates, which simplifies the analysis.

Atal Pension Yojana Contribution Collection

Entry 37B of Notification 12/2017-CT(Rate): Services by way of collection of contribution under the Atal Pension Yojana (APY) are exempt. Banks and post offices that debit customers' savings accounts to remit APY premiums to NSDL/CRA are not required to charge GST on this facilitation activity.

Point-of-Presence (PoP) services under the broader National Pension System (NPS) are taxable at 18%, so the APY exemption is specific and should not be extrapolated to other NPS-related intermediation.

Category 3: Government-Backed Insurance Schemes

A distinct cluster of exemptions covers premiums and reinsurance under government-sponsored insurance products. The following schemes carry zero GST on insurance premiums:

• Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY) — term life cover, annual premium revised periodically by the government, GST: nil
• Pradhan Mantri Suraksha Bima Yojana (PMSBY) — accidental death and disability cover, annual premium revised periodically, GST: nil
• Aam Aadmi Bima Yojana (AABY) — social security scheme for unorganised sector workers, GST: nil
• Life micro-insurance products notified under the IRDAI Act with sum assured up to Rs. 2 lakh, marketed under government schemes: GST: nil

Reinsurance of the above is also exempt, preventing cascading costs in the insurance distribution chain.

Critical distinction: When a bank acts as a corporate agent to distribute these products, its distribution commission from the insurer is taxable at 18%. The exemption attaches to the insurance premium itself, not to the bank's intermediation fee. Banks that net the commission off internally rather than invoicing it may still have a GST output liability on that commission. This distinction consistently trips up bank compliance teams during GST audits.

ITC Apportionment: The Most Consequential Compliance Issue for Banks

Banks are uniquely exposed to the ITC apportionment problem. Because a large share of their income — interest, securities activity — is either exempt or outside GST, they cannot claim full ITC on all their inputs and input services.

The Two Options Under Section 17

Option A — Rule 42/43 Apportionment: Banks must calculate the ratio of taxable turnover to total turnover (including exempt + outside-GST income) and restrict ITC proportionally. Rule 42 covers inputs and input services; Rule 43 covers capital goods. For most large banks, interest income dominates the denominator. The taxable-to-total ratio is typically 10–20%, meaning 80–90% of ITC must be reversed.

Option B — Section 17(4) of the CGST Act: Banking companies as defined, financial institutions, and NBFCs may opt for a standard 50% reversal — they avail 50% of eligible ITC and reverse the remaining 50%. This is administratively simpler and, for banks where the taxable ratio is below 50%, materially more favourable. The election must be made at the start of the financial year; mid-year switching requires CBIC approval.

Worked Example: Section 17(4) vs. Rule 42

Option A (Rule 42): Allowable ITC = 13.3% × Rs. 40 lakh = Rs. 5,32,000. Reversal = Rs. 34,68,000.

Option B (Section 17(4)): Avail 50% = Rs. 20,00,000. Reversal = Rs. 20,00,000.

The Section 17(4) route delivers Rs. 14,68,000 more net ITC in this illustration. Large banks with interest income that dwarfs fee income almost always benefit from the 50% option. A smaller bank or NBFC with a higher fee-to-interest ratio should run the Rule 42 calculation before defaulting to Section 17(4).

Place of Supply: Getting the CGST/IGST Split Right

Place-of-supply rules under Section 12 of the IGST Act 2017 determine whether a banking service generates CGST + SGST or IGST.

• Registered recipient: Place of supply = location of the registered recipient. A registered company in Delhi using a bank branch in Mumbai will be charged IGST, allowing seamless credit in the Delhi GSTR-2B.
• Unregistered recipient (retail): Place of supply = location of the bank branch providing the service. A retail customer at a Chennai branch gets CGST + Tamil Nadu SGST.
• NRI / overseas: Services meeting the definition of "export of services" under Section 2(6) of the IGST Act are zero-rated — the recipient must be outside India, consideration must be received in convertible foreign exchange, and the supplier and recipient must not be mere establishments of the same entity. NRI-specific banking products, international wire transfers, and trade finance for exporters can qualify for zero-rating.

Practical implication: If your GSTIN is not updated on the bank's KYC records, the bank will default to CGST + SGST based on its own branch location. If the bank is in a different state from your registered office, the credit that appears in GSTR-2B will be CGST + SGST of the bank's state — which you cannot use. Update your GSTIN with every bank holding a business account.

Pitfalls to Avoid: Six Mistakes That Cost Real Money

1. Treating All "Interest" as Exempt Without Analysis

Not every charge labelled "interest" qualifies. A flat "bounce charge" of Rs. 500 per dishonoured cheque is not interest — it is a service fee for processing the dishonour, taxable at 18%. Similarly, "commitment fees" on undrawn credit lines are service charges, not interest. Misclassification exposes banks to demands under Section 73/74 and business borrowers to blocked ITC.

2. GSTIN Not Updated on Bank Records

This is the single most common reason registered businesses lose ITC on banking charges. Banks with branches in multiple states generate tax invoices at the branch level. If your firm's GSTIN (say, a Karnataka registration) is not on file at the Mumbai branch where your current account sits, you get CGST + Maharashtra SGST, which never matches your Karnataka GSTR-2B. Audit your bank KYC records now — especially if you have accounts across states.

3. Confusing "No GST Line on Statement" With Exemption

Retail customers frequently see no GST entry on a monthly statement and assume the service is exempt. Banks often quote AMC charges inclusive of GST without breaking it out. You are entitled to a tax invoice for every taxable charge. Request it — especially for loan processing fees, locker rent, and demat charges — before assuming no GST has been recovered.

4. ITC on Loan Processing Fees Claimed Incorrectly

A registered business can claim ITC on GST charged on a loan processing fee only if the loan relates to the business's taxable activity. A manufacturing firm borrowing to buy machinery may claim the ITC. The same firm borrowing for a director's personal house construction cannot. Document the loan purpose clearly at the time of borrowing — retrofitting documentation during an audit is always harder.

5. Brokerage on Securities Transactions Not Invoiced Separately

A bank acting as broker for a client's securities transactions must charge 18% GST on the brokerage, even though the underlying trade is outside GST. Banks that net brokerage off the trade settlement rather than raising a separate tax invoice are understating output GST. SEBI's fee transparency requirements and GST invoicing norms now require explicit breakout of brokerage + GST on contract notes.

6. PMJJBY/PMSBY Refund Entries Issued With GST

When a bank debits a customer's savings account for a PMJJBY premium and then reverses the debit (incorrect debit, ineligible account, or customer opt-out within the free-look period), the reversal does not require a GST credit note — the original transaction carried zero GST. Banks that issue zero-amount credit notes with a nominal GST figure create GSTR-1 mismatches that require reconciliation. Issue a plain cancellation entry, not a GST credit note.

Worked Example: GST on a Business Term Loan — Full Breakout

Scenario: A Karnataka-registered private limited company takes a Rs. 2 crore commercial property loan from a nationalised bank's Mumbai branch for business premises.

Total GST in year 1: Rs. 18,000 + Rs. 3,600 + Rs. 900 + Rs. 1,440 = Rs. 23,940

The company can claim Rs. 23,940 as ITC in GSTR-3B for April 2026 (or whichever month the bank's GSTR-1 reflects the invoice), provided:

1. The bank's tax invoice carries the company's Karnataka GSTIN.
2. The bank charges IGST (Mumbai bank → Karnataka customer = inter-state supply).
3. The invoices appear in GSTR-2B auto-populated from the bank's GSTR-1.
4. The loan purpose is documented as acquisition of business premises used for taxable supplies.

Interest paid over 12 months — approximately Rs. 17,00,000 — flows through the bank's books as exempt income, does not appear in GSTR-1, and creates no GST event whatsoever for either party.

Recent Developments and Clarifications for FY 2026-27

UPI and digital banking: CBIC has maintained the settled position that UPI peer-to-peer transactions carry no GST on transaction fees. However, "premium" or "value-added" UPI features — higher-limit transfers, co-branded rewards programmes offered through third-party apps — attract 18% GST as distinct services if they constitute a separately contracted supply.

Co-branded credit cards: Revenue sharing between banks and co-brand partners (e-commerce platforms, airlines, fuel retailers) under co-branded card arrangements is taxable at 18% on the bank's share of interchange and annual fees. CBIC's 2024 clarification confirmed that reward redemptions themselves remain outside GST — the bank does not make a "supply" when a customer redeems points — but the bank's service to manage the programme and facilitate redemptions is taxable.

MSME guarantee schemes: Guarantee fees under CGTMSE-backed schemes, where remitted to a government-backed trust constituted under a government scheme, continue to be analysed under the social welfare exemption entries. The analysis turns on whether the trust meets the definition of a "governmental authority" under GST law. This is an area where CBIC circulars (most recently in 2024-25) continue to fine-tune the position — verify the latest circular on the GST portal (gst.gov.in → Legal → Circulars) before adopting a position.

Key Takeaways

• Interest on loans, deposits and advances is exempt under Entry 27 of Notification 12/2017-CT(Rate) — no output tax for the bank, no GST cost for the borrower on the interest component; only identifiable service fees attract 18% GST.
• Securities transactions — buying, selling, and transferring shares or bonds — are outside the GST net under Schedule III; brokerage fees on those transactions are taxable at 18% and must be invoiced separately.
• RBI's own statutory services and currency chest operations by authorised agent banks are exempt under Entries 26A and 26B; other commercial services provided to the RBI at arm's length are taxable.
• APY contribution collection is exempt; NPS PoP services are taxable — the two are frequently confused by bank compliance teams.
• Premiums on PMJJBY, PMSBY and AABY carry zero GST; the bank's distribution commission for selling these products is taxable at 18% — a distinction that triggers audit adjustments for banks that treat the full amount as exempt.
• Section 17(4) provides a simplified 50% ITC reversal for banking companies — almost always more favourable than Rule 42/43 for banks where interest income dominates the revenue mix; make the election at the start of FY 2026-27 and document it in the compliance workpapers.
• Update your firm's GSTIN with every bank holding a business account — mismatched state GST charges block ITC in GSTR-2B and are the single most preventable ITC leakage for multi-state businesses.

All exemption entries and section references are based on the CGST Act 2017, IGST Act 2017, and CBIC Notifications current as of FY 2026-27 / AY 2027-28. Verify against the latest CBIC notification and circulars on the GST portal before taking a filing position.