Two different charges, two different purposes
GST interest (Section 50 of the CGST Act) compensates the government for tax you owed but paid late — it's calculated on the tax amount itself, at 18% per annum, prorated for the exact number of days late. GST late fee (Section 47) is a separate penalty for filing the return itself late, calculated per day regardless of how much tax was actually due, and capped at a maximum.
Both apply independently when a return is filed late with tax still owing — you don't choose one or the other, and neither offsets the other.
Interest — a worked example
Formula: interest = tax amount × 18% ÷ 365 × days delayed.
On ₹50,000 of unpaid tax, 30 days late: interest = ₹50,000 × 18% ÷ 365 × 30 = about ₹739.73, for a total payable of about ₹50,739.73. The same ₹50,000 delayed for 90 days instead accrues about ₹2,219.18 in interest — three times the delay produces roughly three times the interest, since it scales linearly with days.
Late fee — a worked example
The GSTR-3B late fee is ₹50 per day (split ₹25 CGST + ₹25 SGST) for a normal return, or ₹20 per day (₹10 + ₹10) for a nil return (a return with no tax liability), each capped — commonly ₹5,000 for a normal return and ₹500 for a nil return, per current GSTN practice (these caps have changed over time and by turnover, so verify the current figure for your filing period).
A normal return filed 15 days late accrues ₹50 × 15 = ₹750 in late fee. The same normal return filed 200 days late would mathematically compute to ₹10,000, but is capped at ₹5,000 — the cap, not the per-day rate, determines the charge once you're sufficiently overdue. A nil return filed 15 days late accrues only ₹20 × 15 = ₹300, reflecting the lower rate for returns with no actual tax due.
The combined cost of filing late
For a normal return with tax due, filed late, both charges apply together — interest on the unpaid tax (uncapped, growing with the delay) plus the late fee on the return (capped). For a nil return, there's no tax to accrue interest on, so only the smaller nil-return late fee applies.
Because interest has no cap and compounds with time while the late fee is capped fairly low, the interest charge usually dominates the total cost for any meaningfully overdue payment with real tax due — filing (and paying) on time avoids both, but if you must choose, minimizing the delay matters more for the uncapped interest than for the already-capped late fee.