Why Tax Clarity Matters for Lenders

GST on Co-Lending: Why Tax Clarity Matters for Lenders 

As co-lending expands, the distinction between interest income and service income is becoming an important consideration for lender partnerships. 

Co-lending has emerged as a way for banks and NBFCs to combine complementary strengths. Banks can contribute funding capacity, while NBFCs bring customer reach, sourcing capabilities and local credit expertise. Together, these arrangements can help expand formal credit access while distributing funding and lending responsibilities. 

However, the economics of co-lending depend on more than the interest rate offered to the borrower. The tax treatment of transactions between lending partners can also influence the commercial viability of these arrangements. 

The Central GST Question 

Under India’s GST framework, interest on loans is generally exempt from GST. However, fees charged for services such as loan processing, administration or facilitation are generally taxable. 

The challenge arises when a co-lending arrangement involves activities performed by an NBFC on behalf of, or for the benefit of, a bank. If the NBFC sources customers, undertakes credit assessment, services loans or performs other operational functions, an important distinction emerges: is the income retained by the NBFC entirely interest from lending, or does some portion represent consideration for services provided to its lending partner? 

The answer may depend on the actual arrangement, contractual terms and nature of the activities performed. Merely describing a payment as interest or a service fee may not, by itself, settle its tax treatment. 

Why This Matters for Lenders 

Uncertainty over the classification and valuation of income can affect partnership economics in several ways. 

First, it can change the effective cost of a co-lending arrangement and influence how the commercial benefits are divided between partners.  

Second, it creates a need for greater clarity in agreements, accounting treatment, invoicing and tax compliance. 

Third, it makes financial modelling more important. Lenders need to understand how different tax treatments could affect margins, cash flows and the viability of specific partnership structures. 

Recent reporting in October 2026 indicated that a GST Council fitment committee had considered an 18% GST treatment for services provided by NBFCs to banks in co-lending arrangements. However, this should not be treated as a final, notified change without confirmation of the applicable government decision and implementation details. 

Banks and NBFCs should review their co-lending agreements to identify the activities performed by each partner, the basis for income allocation, the treatment of service-related payments and the supporting documentation. They should also assess potential tax exposure and model the financial impact of alternative interpretations, with specialist tax advice where necessary. 

Co-lending is not simply a funding partnership. It is an operating model involving shared responsibilities, economics and controls. Greater clarity on GST could help lenders structure these partnerships with more predictable costs and fewer disputes. Until then, sound contractual design, transparent income classification and careful financial assessment remain essential. 

The objective is not merely to determine the tax cost of co-lending, but to ensure that the partnership remains commercially viable, operationally sound and compliant.