GST on banks' fund transfer pricing and NBFC co-lending services clarified
What changed. On the recommendations of the 57th GST Council meeting, CBIC has clarified two issues for the banking sector.
- Fund transfer pricing (FTP). Under FTP, a bank's head office notionally pools funds from deposit-mobilising branches and allocates them to lending branches at an internal price. Some demands had treated this as a taxable financial service between distinct persons under section 25(4) of the CGST Act. CBIC clarifies that the notional amount or interest recorded in the books for making a loan or advance under FTP is "interest" for the exemption under Notification No. 12/2017–Central Tax (Rate).
- Co-lending by NBFCs. Under the RBI (Commercial Banks – Transfer and Distribution of Credit Risk) Directions, 2025, an NBFC in a co-lending arrangement provides "lending services" to the bank, such as customer sourcing, KYC, credit appraisal, underwriting, servicing, monitoring, collection and recovery. CBIC clarifies that these services are taxable under GST. Their value is the value specified in the agreement between the NBFC and the bank.
Who it affects. Banks with branch networks using FTP, and NBFCs and banks in co-lending arrangements.
From when. The circular is dated 28 October 2026.
What to do. Banks facing demands on FTP notional interest can rely on the circular in their replies. NBFCs in co-lending arrangements should check that GST is charged on the fees for lending services, and that the co-lending agreements clearly state the value of these services.
Official source: CBIC Circular No. 266/12/2026-GST dated 28 October 2026
This is general information based on the law as on the date shown, not professional advice. Rules change often; check the current position before acting.