GST on Financial Services in India: Comprehensive Guide (2025)
Introduction to GST on Financial Services
India’s GST regime has streamlined indirect taxes across sectors, and the financial services industry is no exception. GST on financial services in India is structured to bring uniformity and clarity while acknowledging the complex nature of banking, insurance, investment, and lending services. Financial services are taxed primarily at 18%, but the GST law also specifies clear exemptions, a simplified 50% ITC mechanism, and detailed compliance protocols for service providers.
Understanding the nuances of GST in financial services helps banks, NBFCs, insurance companies, and investment service providers avoid penalties, manage cash flows, and ensure seamless compliance with the GST law in 2025.
GST Rates and SAC Code for Financial Services
Standard GST Rate (18%) and SAC 9971
Financial services are taxed at 18% under GST, under Services Accounting Code (SAC) 9971. This SAC covers:
- Banking services
- Insurance services
- Lending and credit facilities
- Fund management and investment advisory
- Brokerage and portfolio management
- Other related financial activities
This uniform rate simplifies GST application while ensuring accurate reporting across the industry.
Taxable Financial Services under GST
The following services attract GST at 18% under SAC 9971:
Banking Charges (Account, ATM, Loan Fees)
- Account maintenance charges
- ATM withdrawal charges (beyond free limits)
- Loan processing/setup fees
- Cheque bounce charges
- ECS/NEFT/RTGS handling fees
These services are fee-based and are taxable at 18% under GST, applicable on a forward charge basis.
Insurance Premiums
GST at 18% applies to:
- Life insurance (ULIPs, term plans)
- Health insurance
- General insurance (vehicle, property, fire)
- Reinsurance and micro-insurance products
GST is collected on the gross premium charged, with specific provisions for partial exemptions under certain schemes.
Investment Advisory and Brokerage Services
Services like:
- Mutual fund distribution fees
- Brokerage on equity and commodity transactions
- Portfolio management services
- Investment advisory fees
are subject to 18% GST, with brokers and advisors responsible for GST collection and payment.
Loan Processing and Miscellaneous Charges
While pure interest income on loans is exempt, ancillary charges like:
- Loan processing fees
- Foreclosure charges
- Documentation and administrative charges
are taxable at 18% under GST.
GST Exemptions in Financial Services
Despite the broad applicability of GST, certain financial services remain exempt:
Interest on Loans and Advances
Pure interest income earned on:
- Loans and advances
- Credit card outstanding balances
- Overdraft facilities
is exempt under GST, recognizing it as a financial transaction rather than a service.
Services by Reserve Bank of India (RBI)
All services provided by the RBI are exempt under GST, maintaining the sovereign authority’s tax-neutral operations.
Government-approved Insurance Schemes
Certain government insurance schemes, such as Pradhan Mantri Fasal Bima Yojana, are exempt under GST to promote social welfare initiatives.
Understanding Input Tax Credit (ITC) for Financial Services
50% ITC Rule Under Section 17(4)
Banks, financial institutions, and NBFCs providing both taxable and exempt services are allowed to claim 50% of eligible Input Tax Credit (ITC) on inputs, input services, and capital goods every month. The remaining 50% ITC lapses and cannot be carried forward.
This simplified mechanism under Section 17(4) was introduced to avoid complex apportionment and ensure ease of compliance.
ITC Utilization and Restrictions
- ITC can be utilized for payment of output GST liability on taxable services.
- No ITC can be claimed on inputs exclusively used for exempt services.
- Financial institutions must opt for this 50% mechanism consistently for a financial year and cannot switch to rule-based apportionment mid-year.
GST Compliance Highlights for Financial Service Providers
Correct Use of SAC Codes and GST Rates
Use SAC 9971 for all financial services under the standard 18% GST rate for clear reporting in invoices and returns.
Segregating Exempt and Taxable Income
Maintain clear records separating:
✅ Exempt: Pure interest income, RBI services, specified crop insurance schemes.
✅ Taxable: Fees, charges, commissions, brokerage, insurance premiums.
This is crucial for accurate GST payment and ITC reconciliation.
Regular ITC Reconciliation Practices
- Reconcile eligible ITC monthly while applying the 50% restriction.
- Conduct quarterly internal audits to track compliance.
- Maintain documentation for input purchases to substantiate ITC claims.
Summary Table: GST Treatment of Financial Services
| Service Type | GST Treatment | ITC Eligibility |
|---|---|---|
| Interest on loans and advances | Exempt | ❌ Not applicable |
| Banking charges & loan fees | Taxable @ 18% | ✅ Eligible (50% rule) |
| Insurance premiums | Taxable @ 18% | ✅ Eligible (50% rule) |
| Investment & brokerage services | Taxable @ 18% | ✅ Eligible (50% rule) |
| RBI services | Exempt | ❌ Not applicable |
FAQs on GST in Financial Services in India
Is interest income taxable under GST?
No, pure interest earned on loans, advances, and deposits is exempt from GST.
What GST rate applies to insurance premiums?
Insurance premiums for life, health, and general insurance attract GST at 18%.
Can banks fully claim Input Tax Credit (ITC)?
No, banks and financial institutions can only claim 50% of eligible ITC under Section 17(4), with the balance forfeited.
Are RBI services taxable under GST?
No, services provided by the Reserve Bank of India are exempt from GST.
What is SAC code 9971 used for?
SAC 9971 is used to classify all financial and related services under GST for reporting and invoicing.
How is GST compliance simplified for banks?
Banks can use the optional 50% ITC mechanism under Section 17(4) to avoid complex apportionment while ensuring compliance.
Conclusion: Ensuring GST Compliance in Financial Services
GST on financial services in India requires financial institutions to clearly understand taxable vs exempt categories, use correct SAC codes, apply the 50% ITC rule consistently, and maintain transparent documentation. This approach ensures smooth compliance, reduces audit risks, and maintains financial discipline under India’s evolving GST landscape in 2025.
