GST for banking, NBFC and financial services

Exempt interest, taxable fees, a Rule 42 reversal that dwarfs everything, and a place of supply rule of its own.

Anandaday Misshra, Founder and Managing Partner, AMLEGALS · 8 min read · updated 3 September 2026

The short answer

Financial services exposure sits in the exempt and taxable split between interest and fee income, the Rule 42 apportionment which for a lender is the single largest number, the place of supply rule for banking services under Section 13(8)(a) for cross border supplies, the ISD and cross charge position across a branch network, the treatment of recoveries such as penal charges and foreclosure charges, and the specified valuation mechanisms for foreign exchange and life insurance business.

Exempt and taxable

Interest on deposits, loans and advances is exempt, which makes it exempt turnover for the apportionment rules. Fee, commission, processing charges and service income are taxable.

Penal charges, foreclosure and prepayment charges, cheque return charges and documentation charges each need a recorded position, and the analysis differs between a charge that is part of the interest arrangement and one that is consideration for a service.

Circular 178/10/2022-GST is relevant to charges flowing from a breach, and the reasoning must be applied head by head rather than generally.

Discounting, factoring and assignment of receivables have their own analyses, and the treatment of the discount as interest or as a service is the question.

Apportionment and network

Rule 42 apportionment with exempt turnover dominated by interest income is the largest single computation in the sector, and the option under Rule 38 for a banking company or a financial institution to avail a fixed proportion of credit should be evaluated against the actual computation.

Branch networks require cross charge for internally generated services and mandatory ISD for third party common services, and the volume makes automation necessary.

Place of supply for banking and financial services to a recipient outside India is the supplier's location under Section 13(8)(a), so cross border service income is generally not an export.

Foreign exchange transactions are valued under Rule 32(2) with an annual option, and life insurance business under Rule 32(4).

The controls

A head by head income mapping with the exempt or taxable position recorded and reviewed annually.

The Rule 42 and Rule 38 comparison run annually before the option is exercised.

An automated cross charge and ISD process, because manual monthly distribution across a branch network fails.

A recorded annual option for the foreign exchange valuation method.

What to do on Monday

Map every income head to an exempt or taxable position and review it annually.
Run the Rule 42 against Rule 38 comparison before exercising the option each year.
Automate cross charge and ISD across the branch network.
Record the annual foreign exchange valuation option before the year begins.

On your own facts

This page states the general position. A reader with a specific question on their own facts may write to the GST practice at AMLEGALS.

Write to the GST practice

Questions we are asked on this

Is interest income exempt?

Interest on deposits, loans and advances is exempt, and it forms exempt turnover for the apportionment rules.

Are penal charges taxable?

Head by head. A charge flowing from a breach is analysed under Circular 178/10/2022-GST; a charge for a service is taxable.

Should we use the Rule 38 fixed proportion?

Compare it against the actual Rule 42 computation annually before exercising the option.

Is cross border banking service income an export?

Generally not, because Section 13(8)(a) places the supply at the supplier's location.

How is foreign exchange income valued?

Under Rule 32(2), with an option that must be exercised for the financial year.

In this cluster

GST Insights is published by AMLEGALS for general information. Law stated as on 3 September 2026. Not advice on any particular set of facts; not an advertisement or a solicitation under Rule 36 of the Bar Council of India Rules. Readers with a question on their own facts may write to the GST practice of their own accord.