Interest Rates and GST on Credit Cards in India: How They Are Calculated

A credit card has many invisible charges. Two of them interest and GST are often confused. The interest is charged by the bank on unpaid dues; GST is the tax on services charged by the bank (annual fee, interest charge, late fee, processing fee). Both show up on the statement; both need to be understood separately. Here is the clean picture.

Credit card interest rates in India are determined by the issuing bank and apply on unpaid dues after the due date and on cash advances from day one. GST in India applies as a service tax on the bank’s charges to the cardholder including the interest amount, the annual fee, the late fee and the processing fee at the prevailing GST rate. The GST is not a tax on the credit card payment itself, but on the bank’s services.
 

How is credit card interest calculated?

Credit card interest is typically expressed as a monthly rate (e.g., 3.5% per month) and applies on unpaid balances from the date of transaction (for cash advances) or from the day after the payment due date (for revolving balances). The effective annual rate is the monthly rate annualised.
 

What is GST and where does it apply on a credit card?

GST stands for Goods and Services Tax. On a credit card, GST is applied as a service tax on the charges your bank levies interest, annual fee, late payment charge, cash advance fee, foreign transaction markup, EMI processing fee. It is not applied on the transaction value of a purchase.
 

Quick clarity what does and does not attract GST

How is GST charged on the interest amount?

GST is applied on the interest amount charged by the bank, at the prevailing GST rate notified by the government. For example, if the interest for the month is ₹500 and the applicable GST rate is 18%, the GST is ₹90, and the total interest debit is ₹590.
 

When does credit card interest get charged in the first place?

Three main scenarios: (1) you do not pay the full statement balance by the due date, interest accrues on the unpaid amount and on new purchases until paid; (2) you make a cash advance / cash withdrawal interest accrues from day one; (3) you take an EMI conversion interest is charged on the EMI principal.
 

How do you avoid credit card interest?

• Always pay the full statement balance by the due date interest then does not apply on regular purchases.
• Avoid cash advances unless necessary they accrue interest from day one.
• Set up auto-debit of the full statement amount from your savings account.
• Use EMI conversion thoughtfully convenient, but it does carry interest plus GST on it.
   

Conclusion

Credit card interest is the bank’s charge on unpaid dues. GST is the tax on the bank’s charges to you. The cleanest way to keep both at zero on regular purchases is to pay the full statement balance by the due date every month.
 

Frequently asked questions

Q. Is GST charged on credit card payments?

No. GST is not charged on the transaction value of your purchase. It is charged on the bank’s service fees interest, annual fee, late fee, etc.

Q. Is GST charged on credit card interest?

Yes. GST is applied on the interest amount charged by the bank at the prevailing GST rate.

Q. What is the GST rate on credit card services?

The prevailing GST rate on financial services is notified by the government. Confirm the current rate on your bank’s schedule of charges.

Q. How is the interest free period?

Most credit cards offer an interest free period of around 20–50 days, applicable when the full statement balance is paid by the due date. Cash advances and unpaid balances do not get the interest-free period.

Q. Will I be charged interest if I pay only the minimum due?

Yes. Paying only the minimum due continues interest accrual on the unpaid balance from the transaction date.

Q. How can I see the interest and GST on my statement?

Both interest and GST appear as separate line items on your credit card monthly statement.

Q. Is GST applied on cashback received?

Cashback as a credit on your card is not taxed in your hand.

Q. Does converting a transaction to EMI attract GST?

Yes. The processing fee, interest on the EMI principal and any associated charges all attract GST.

Q. Can I claim GST input credit on credit card fees?

For businesses with a GST registration, input tax credit is available where the credit card is in the name of the business and the fees relate to taxable business activity, subject to applicable rules. Consult a tax advisor.

Disclaimer: This article is provided by AU Small Finance Bank for general information. Product features, charges, eligibility and procedures referenced are governed by AU Small Finance Bank policy and applicable RBI / regulatory guidelines, and are subject to change without notice. Please refer to www.au.bank.in for the latest product terms. Please consult a qualified tax advisor on tax matters before relying on any information provided here.