Quick Summary
In a major relief for borrowers and financial institutions, the Ministry of Finance has clarified that penal charges imposed by banks and non-banking financial companies (NBFCs) for non-compliance with loan terms will not attract 18% Goods and Services Tax (GST). The announcement follows discussions at the 55th GST Council meeting, where stakeholders sought clarity on the tax treatment of penal charges in light of the Reserve Bank of India (RBI)'s directive issued on August 18, 2023. Backgro
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FAQ :
No, the Ministry of Finance has confirmed that penal charges imposed by banks and NBFCs for non-compliance with loan terms will not attract 18% Goods and Services Tax (GST).
The announcement follows discussions at the 55th GST Council meeting, seeking clarity on the tax treatment of penal charges after the RBI's directive on August 18, 2023.
The RBI instructed regulated entities to stop using the term "penal interest" and replace it with "penal charges" for better transparency with borrowers.
This decision prevents an increase in the cost of loan non-compliance, meaning borrowers will not face unexpected additional tax liabilities on these charges.
Banks and NBFCs now have a clear tax position on penal charges, which helps in better compliance with RBI norms and reduces ambiguity.
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