Notional interest earned on refundable security deposit can't be treated as consideration

  • GST
  • Case Law
  • Financeseva

Fact of the Case 

The appellant was engaged in the business of renting commercial property. It intended to enter contractual arrangements with potential tenants whereas in the premises would be leased out for a monthly rent.  

The contract would be based on reserved monthly rent and refundable caution deposit/security deposit. As per contract terms, the deposit received shall be returned without interest on termination.  

It submitted a request for advance judgment to determine whether notional interest on the security deposit should be considered for the purposes of arriving at total income from leases. 

The Authority for Advance Ruling held that the notional interest on the security deposit shall be taken into consideration for the purposes of arriving at total income. The appellant appealed the order. 


The Appellate Authority for Advance Ruling noted that it would be important to determine whether the security deposit is a rental service consideration.  

According to an arrangement to the meaning of 'thought' as given in Section 2(31) of the CGST Act, a store given regarding the supply of goods or services will not be considered as installment made for such stock except if the provider applies the store as thought for the said supply. 

However, at the time of refund of the security deposit, if any amount will be adjusted by the provider towards the delivery of the rental service, then it will be considered a consideration. In the present case, the notional interest earned by the supplier in the security deposit would be an amount earned by investing in the security deposit.  

The interest earned by the appellant from a third person, on account of investing the security deposit amount would not be a payment made by the third person “in respect of, in response to, or for the enticement of the supply of the renting service”. Therefore, it was held that the notional interest earned.