VKVikash Khanal

Bank guarantee cost & surety bond comparison

Commission is only part of what a bank guarantee costs. This adds charges, stamp duty, GST you cannot recover and the return lost on the FD margin, then compares the total with an insurance surety bond.

Rules as on 6 October 2026
e.g. 12 months validity + 3 months claim
Set by the state where the BG is executed
CC rate, or the return the cash earns in the business

Surety bond for comparison

What a bank guarantee really costs

  • Commission, quoted as a percentage a year. Most banks charge it per quarter or part of a quarter for the full period, including the claim period, and collect it upfront. A 15-month BG pays five quarters.
  • Issuance, amendment and processing charges, plus courier or SFMS charges.
  • GST at 18% on commission and charges (financial services). It is recoverable as input tax credit only if the guarantee is for your taxable business.
  • Stamp duty on the guarantee instrument. Each state sets it, some as a fixed amount and some as a percentage with a cap.
  • Cash margin, usually 10–25% for working-capital customers and up to 100% for new or weak ones. It is held in a fixed deposit that earns interest, but the cash is not available to the business. The real cost is the gap between your cost of funds and the FD rate.

Insurance surety bonds

The General Financial Rules, 2017 were amended on 2 February 2022 to let central government buyers accept insurance surety bonds as bid security and performance security, alongside bank guarantees and FDs. The IRDAI Surety Insurance Contracts Guidelines took effect on 1 April 2022 and were relaxed in 2023. A surety bond does not use up bank limits and often needs little or no collateral. Not every buyer accepts one, though. Many state departments, PSUs and private employers still ask for a bank guarantee, so check the tender document before you price it in. Read the bond's wording as well. Government buyers expect it to be unconditional and payable on demand, like a BG.

Using the result

Compare effective cost a year across banks and instruments. Then add the value of the non-fund limit you free up. A contractor working near its BG limit may find that a slightly costlier surety bond is the cheaper way to keep bidding.

Common questions

Is GST payable on bank guarantee commission?

Yes. Commission and charges for issuing a guarantee are financial services taxed at 18%. A registered business can claim the GST as input tax credit when the guarantee relates to its taxable supplies.

Does the claim period count for commission?

Usually yes. Banks charge commission until the claim expiry date, because their exposure runs until then. Ask the bank whether a part-quarter is charged in full.

Can I offer a surety bond instead of a BG in a government tender?

Under the amended GFR 2017, central ministries and departments may accept insurance surety bonds as bid or performance security. Whether a particular tender accepts one depends on its terms. State governments and PSUs follow their own rules.