GST and TDS on Loan Charges, Processing Fees, and Interest

• Borrowers: Individuals, firms, and companies paying interest, processing fees, penal charges, or foreclosure fees on retail, MSME, or corporate loans.
• Lenders: Scheduled Commercial Banks, cooperative banks, NBFCs, Housing Finance Companies (HFCs), and private corporate financiers.
• Statutory Frameworks:
  • CGST Act, 2017 & State GST Acts: Notification No. 12/2017-Central Tax (Rate), Entry 27 (SAC 9971).
  • Section 194A, Income-tax Act, 1961: TDS on interest other than interest on securities.
  • Section 40(a)(ia), Income-tax Act, 1961: 30% disallowance of expenditure for non-deduction of TDS.
  • Section 16 & Section 17(5), CGST Act, 2017: Input Tax Credit (ITC) eligibility on loan charges.

                        [Loan Facility Availed by Borrower]
                                        │
                                        ▼
                  [Analyze Component: Interest vs Ancillary Fee]
                                        │
         ┌──────────────────────────────┴──────────────────────────────┐
         ▼                                                             ▼
[Regular Loan Interest]                                       [Ancillary Loan Charges]
         │                                                             │
         ├── GST Status: EXEMPT (Entry 27)                             ├── GST Status: 18% GST APPLIES
         │   (Except Credit Card Interest = 18%)                       │   (Processing, valuation, legal,
         │                                                             │    documentation, inspection fees)
         └── TDS Analysis (Income Tax):                                │
                     │                                                 └── Input Tax Credit (ITC):
         ┌───────────┴───────────┐                                         Claimable by business entities
         ▼                       ▼                                         if loan is used for business
   [Lender is Bank]       [Lender is NBFC]                                 purposes under Section 16 CGST
         │                       │
   NO TDS Required        10% TDS Mandated
   under Section          under Section 194A
   194A(3)(iii)(a)        (File Form 26Q)

1. GST on Loan Fees and Processing Charges

When an enterprise takes a ₹5 crore working capital term loan with a 0.5% processing fee:

• Processing Fee: ₹2,50,000.
• GST (18%): ₹45,000 (₹22,500 CGST + ₹22,500 SGST, or ₹45,000 IGST).
• Total Amount Debited: ₹2,95,000.
• Input Tax Credit (ITC): If the borrower is a GST-registered business entity and the loan is deployed for taxable commercial operations, the ₹45,000 GST can be claimed as Input Tax Credit under Section 16 of the CGST Act to offset output GST liabilities.

2. TDS Withholding Protocol on NBFC Loans

If a partnership firm or private limited company borrows a ₹2 crore business loan from an NBFC at 12% interest per annum (annual interest ₹24 lakh):

• The borrower cannot pay the gross interest to the NBFC.
• Under Section 194A, the borrower must deduct 10% TDS (₹2,40,000).
• The borrower pays ₹21,60,000 net interest to the NBFC and deposits ₹2,40,000 into the central government treasury via Challan ITNS 281 by the 7th of the following month.
• The borrower issues quarterly Form 16A TDS certificates to the NBFC.
• If the borrower fails to deduct this TDS, ₹7,20,000 (30% of ₹24,00,000) is disallowed from business expenditure under Section 40(a)(ia).

3. Exemption on Bank Loans

If the exact same ₹2 crore loan is borrowed from State Bank of India, HDFC Bank, or ICICI Bank, Section 194A(3)(iii)(a) provides a statutory carve-out. The borrower pays 100% of the interest directly to the bank without deducting any TDS.

1. Failing to Deduct TDS on NBFC Business Loans

Many business accounting departments treat all institutional lenders identically, assuming that because banks do not require TDS, NBFCs like Bajaj Finance, Tata Capital, or Aditya Birla Finance are also exempt. Non-banking financial companies do not enjoy statutory exemption under Section 194A(3)(iii)(a) unless specifically notified by the Central Government. Hundreds of businesses suffer 30% expenditure disallowances every year during tax audits due to this single oversight.

2. Forfeiting Input Tax Credit on Processing Fees

Borrowers regularly instruct banks to deduct processing fees directly from personal savings accounts instead of business current accounts, or fail to provide their GSTIN during loan onboarding. If the lender issues a B2C tax invoice without the borrower's GST number, the 18% GST (which can run into lakhs on substantial commercial borrowings) cannot be claimed as Input Tax Credit, becoming a dead business expense.

3. Missing the Credit Card GST Exemption Carve-Out

Cardholders frequently dispute the 18% GST appearing on their credit card statements for interest and revolving finance charges. Entry 27 of Notification No. 12/2017-Central Tax (Rate) contains an explicit exception: "other than interest involved in credit card services." All finance charges, late fees, and revolving interest on credit cards legally attract 18% GST.

4. Overlooking Section 206AB Higher TDS for Non-Filers

If an enterprise borrows from a private financier or unregistered lender who has not filed their income tax returns for the preceding year and has aggregate TDS/TCS of ₹50,000 or more, Section 206AB mandates withholding TDS at double the normal rate (20% instead of 10%). Deducting at the standard 10% rate without verifying the lender's filing status on the income tax portal constitutes a short-deduction default.

Practical GST and TDS Checklist

• Provide GSTIN During Loan Onboarding: Always ensure your business GSTIN and registered trade address are correctly entered in the bank loan application form and sanction letter to ensure GST tax invoices appear in your GSTR-2B for seamless ITC reconciliation.
• Classify Lenders in Accounting Master Files: Configure your accounting software with distinct vendor master tags:
  • Bank - BR Act (No TDS)
  • NBFC - Section 194A (10% TDS)
  • Private Individual - Section 194A (10% TDS / Check 206AB)
• Obtain Lower Deduction Certificates: If borrowing substantial amounts from an NBFC that operates at low margins, ask the NBFC if they hold a Lower/Nil TDS Certificate under Section 197 issued by their jurisdictional Assessing Officer.

Rectifying Historical Defaults

1. Remit Past Due TDS with Interest: If you failed to deduct TDS on NBFC interest in a prior quarter, calculate statutory interest under Section 201(1A) (1% per month from date deductible to date deducted, and 1.5% per month from date deducted to date paid) and deposit the dues immediately.
2. Obtain Form 26A from the NBFC: Under the First Proviso to Section 40(a)(ia), if you failed to deduct TDS but the payee (NBFC) has declared the interest in their ITR and paid taxes, obtain a certificate in Form 26A from a Chartered Accountant. Filing Form 26A revokes the 30% disallowance for that financial year.

Is GST charged on home loan or business loan EMIs?

No. The monthly EMI consists of principal repayment and interest. Pure interest on loans and advances is completely exempt from GST under Entry 27 of Notification No. 12/2017-Central Tax (Rate). GST is charged only on administrative fees, such as processing fees and documentation charges.

Why does my credit card statement show 18% GST on interest charges?

Under the GST exemption notification, interest on credit card services is explicitly carved out from the exemption. All credit card finance charges, interest on revolving balances, and late payment fees are legally subject to 18% GST.

Do I have to deduct TDS when paying loan interest to a bank?

No. Under Section 194A(3)(iii)(a) of the Income-tax Act, interest paid to banking companies governed by the Banking Regulation Act, 1949, cooperative banks, and public financial institutions is exempt from TDS.

Do I have to deduct TDS when paying interest to an NBFC?

Yes. If you are a company, LLP, partnership firm, or an individual/HUF subject to tax audit, you must deduct 10% TDS under Section 194A on interest paid to an NBFC if the total interest exceeds ₹5,000 in a financial year. NBFCs do not have a blanket exemption from TDS.

Can a business claim Input Tax Credit (ITC) on the GST paid on loan processing fees?

Yes. If the loan is utilized wholly and exclusively for business purposes and the business is registered under GST, the 18% GST paid on loan processing fees, valuation charges, and legal appraisal charges is fully eligible for Input Tax Credit under Section 16 of the CGST Act.

What is the penalty if my business fails to deduct TDS on NBFC interest?

Failure to deduct TDS results in: (1) 30% disallowance of the interest expenditure under Section 40(a)(ia), (2) mandatory interest liability under Section 201(1A) at 1% to 1.5% per month, and (3) possible penalty under Section 271C equal to the unpaid TDS amount.

• Business Loan Interest Deduction: Section 36(1)(iii)
• Fees, Penal Charges, and Insurance
• Working Capital Facilities
• Reading a Sanction Letter and Loan Agreement