Is GST Applicable on Interest on Security Deposit?

Is GST applicable on interest on security deposit?

Short answer: no, GST is not charged on interest earned on a security deposit in most rental situations.

But the reason matters. And the wording matters even more.

First, what is interest on security deposit?

In some rentals, the landlord holds the security deposit for a long time.

Sometimes, interest is paid on that amount. Sometimes it’s adjusted in rent. Sometimes it’s just written in the agreement and forgotten.

That interest feels like income. Which is why the GST doubt shows up.

Fair question.

Why GST usually does not apply

GST is charged on supply of goods or services.

Interest on a security deposit does not come from a service. It comes from money being held.

Under GST law, interest on deposits, loans, or advances is treated as a financial transaction, not a service. These are generally exempt.

In simple words:

Money earning money is not the same as money earning service fees.

That’s the difference.

How this looks in a real rental case

Small example.

Monthly rent: ₹25,000

Security deposit: ₹1,00,000

Interest mentioned in agreement: 6% per year

At the end of the lease, interest comes to ₹6,000.

That ₹6,000 is not considered rent.

It is also not considered a taxable service.

So GST is not added on that interest amount.

No extra 18%. No surprise tax line.

But here’s the part people miss

GST depends on nature, not label.

If interest is clearly written as interest on deposit, GST does not apply.

But if the same amount is disguised as something else, things change.

For example:

• Interest adjusted as “extra charges”
• Interest bundled into monthly rent
• Interest shown as a service fee

Then it may lose the exemption.

That’s where confusion begins.

What rental agreements should clearly mention

Quick tip. Look for these words.

• “Interest on refundable security deposit”
• “No service consideration involved”
• “Refundable at end of tenancy”

Clear language keeps GST questions away.

Vague language invites trouble later.

Does GST apply to the security deposit itself?

No.

A refundable security deposit is not taxable under GST because it is not income. It is held as security.

GST applies only if part of the deposit is later adjusted as rent or penalty.

Until then, it stays outside GST.

Common confusion points

These points trip people up:

• Interest is income, but not always GST income
• Rent attracts GST in some commercial cases, deposits don’t
• TDS rules are different from GST rules

Different laws. Different logic.

Mixing them causes unnecessary stress.

FAQ

Is GST charged on interest paid by landlord on deposit?

No, interest on security deposit is generally exempt from GST.

Does GST apply if interest is adjusted in rent?

If adjusted as rent or service charge, GST may apply.

Is security deposit interest taxable under GST law?

No, it falls under exempt financial transactions.

In short

Interest on security deposit is usually outside GST.

Clear wording in the agreement keeps it that way.

Confusion mostly comes from poor drafting.

Still unclear how interest is shown in a specific agreement?