Library / Goods and Services Tax: The Professional's Master Guide

29. Financial Services, Banking and Insurance

Financial services mix exempt interest, taxable fees and money and securities outside GST. The work is deciding which receipts are taxable and how much credit survives.

29.1 Interest, fees and what is outside GST

Services by way of extending deposits, loans or advances, where the consideration is interest or discount, are exempt (other than interest on credit card dues). Money and securities are excluded from the definitions of goods and services (sections 2(52) and 2(102)), so a transaction in money itself, or a sale of shares, bonds or units, is not a supply. Around these sit the fees that are taxable at 18%: loan processing fees, documentation charges, foreclosure charges, account maintenance charges, locker rent, card fees, brokerage and advisory fees.

Following the 55th Council meeting (December 2024), a CBIC circular clarified that penal charges levied by banks and NBFCs under RBI directions do not attract GST, and the exemption for card settlements up to Rs. 2,000 was extended to RBI-regulated payment aggregators (but not payment gateways).

29.2 Banks and the 50% ITC option

A banking company, financial institution or NBFC that supplies both exempt and taxable services has two choices under section 17(4) and rule 38. It can reverse ITC on common inputs under rules 42 and 43 like any other business, or it can take 50% of the eligible ITC every month and let the other 50% lapse. The option, once exercised, cannot be withdrawn during the financial year. The 50% restriction does not apply to tax paid on supplies from one registered person to another with the same PAN.

29.3 Money changing: rule 32

Purchase or sale of foreign currency is a service; the value is not the currency amount. Under rule 32(2)(a) the value is the difference between the buying or selling rate and the RBI reference rate, multiplied by the units of currency. If the RBI reference rate is not available, the value is 1% of the gross amount of Indian rupees provided or received. Alternatively, under rule 32(2)(b), the supplier can opt for a slab value: 1% of the amount up to Rs. 1,00,000 (minimum Rs. 250); Rs. 1,000 plus 0.5% of the amount from Rs. 1,00,000 to Rs. 10,00,000; and Rs. 5,000 plus 0.1% of the amount above Rs. 10,00,000, subject to a maximum of Rs. 60,000.

29.4 Insurance

General insurance, and life insurance other than the individual policies now exempt, is taxable at 18%. For taxable life insurance, rule 32(4) values the service at the premium less the investment portion, or at set percentages of the premium.

From 22 September 2025, individual life insurance policies (term, ULIP and endowment) and individual health insurance policies, including family floater policies and policies for senior citizens, together with their reinsurance, are exempt. Group policies bought by employers remain taxable at 18%. Insurers now have exempt outward supplies, so they must reverse ITC attributable to exempt policies under rules 42 and 43. Commission to insurance agents is still taxable, with the insurer paying tax under reverse charge; to the extent the commission relates to exempt policies, that tax is now a cost.

29.5 Mutual funds, brokers and securities

Units and shares are securities, so their issue, redemption and transfer are not supplies. The asset management company charges management fees to the scheme at 18%. Stock brokers charge 18% on brokerage and related charges. For ITC reversal under rules 42 and 43, the value of securities sold is taken at 1% of the sale value, which prevents a company that sells investments from losing most of its credit.

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