New Delhi, Jan. 29 -- In a significant move for both borrowers and financial institutions, the Ministry of Finance clarified on Tuesday that penal charges imposed by banks and non-banking financial companies (NBFCs) for non-compliance with loan terms will not attract an 18 per cent Goods and Services Tax (GST).

This announcement comes after the 55th GST Council meeting, where the matter was discussed in response to concerns raised by various stakeholders.

These stakeholders had sought clarification on whether GST would apply to such charges, following the Reserve Bank of India's (RBI) directive issued on August 18, 2023.

The RBI had instructed regulated entities to cease using the term "penal interest" in relation to borrowers who fail...