Personal Loan
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Taking a personal loan involves more than just looking at the interest rate and EMI. Borrowers may also have to pay taxes on certain loan-related charges. One of the most important taxes to understand is Goods and Services Tax (GST).
GST generally does not apply to the interest component of a regular personal loan, but it can apply to services and fees charged by the lender, such as processing fees. This means GST can increase the overall cost of borrowing even when your EMI itself does not change.
Here is a simple guide to understanding GST and its impact on personal loans.
What is GST?
GST, or Goods and Services Tax, is an indirect tax charged on the supply of goods and services in India. It was introduced to bring multiple indirect taxes under a common tax system.
For borrowers, GST can apply to certain services provided by banks, NBFCs, and other financial institutions.
However, GST does not apply to every component of a personal loan. The treatment depends on what the lender is charging you for.
What's the Impact of GST on Personal Loans?
GST does not apply directly to the principal or regular interest charged on a personal loan. Instead, it can apply to taxable loan-related charges, such as processing fees and certain service or administrative charges.
For example, if a lender charges a ₹5,000 processing fee and GST is applicable at 18%, the GST would be ₹900, making the total processing-related charge ₹5,900.
GST can impact a personal loan in the following ways:
Increases processing costs: GST adds to the cost of taxable fees charged by the lender.
Reduces net loan disbursal: If fees and GST are deducted upfront, you may receive less than the sanctioned loan amount.
Does not usually increase EMI: GST on a separate processing fee does not normally get added to your regular loan interest or EMI.
Affects total borrowing cost: When comparing loans, consider GST along with interest, processing fees, and other applicable charges.
Makes fee comparison important: A loan with a lower interest rate may not always be cheaper if it has significantly higher fees and applicable taxes.
GST on Personal Loans
The banks generally charge a processing fee of 1% to 2% of the loan amount. And the pre-payment fee between 2% to 5%.
Let’s take an example:
Assuming you have a personal loan of ₹ 5 Lakh.
Fees you need to pay the bank for its services are:
Processing fee of 1% of the loan amount
Pre-payment fee of 2% of the outstanding principal loan amount
Bank fees for a personal loan of ₹ 5 Lakh | Amount payable to the bank | Fee payable when Service Tax is applied at 15% (pre-GST era) | Fee payable when GST is applied at 18% (GST era) | Impact of GST (GST minus Service Tax) |
|---|---|---|---|---|
Processing fees of 1% of the loan amount | ₹ 5,000 | ₹ 750 | ₹ 900 | ₹ 150 |
Pre-payment fees of 2% of the outstanding principal amount | ₹ 10,000 | ₹ 1,500 | ₹ 1,800 | ₹ 300 |
As you can see from the example above, with GST you are paying ₹ 150 extra on the processing fee and ₹ 300 extra on the pre-payment charges, which are negligible amounts. In conclusion, GST has a minuscule effect on personal loans.
Note: The tax percentage has increased from 15% to 18% (3% increase), but it does not affect the EMI amount. GST is not levied on the loan repayment. It only applies to the services that the bank provides to the borrower for processing the personal loan. GST does not affect the loan repayment and the personal loan interest rate
Now that you know the impact of GST on personal loans, you should not be under the misconception that GST makes personal loan an expensive finance option.
Understand The Real Cost Of Your Loan
GST does not apply to your loan amount or interest, but charges like processing fees and prepayment can increase your overall cost.
Frequently Asked Questions
Is GST applicable on personal loans?
Yes. GST can apply to certain charges associated with a personal loan, such as processing and other taxable service fees. However, the interest component of a regular loan is generally exempt from GST.
What is the GST rate on personal loan processing fees?
The commonly applicable GST rate on taxable personal loan processing fees is 18%. The GST is calculated on the processing fee, not on the total loan amount.
Is GST charged on personal loan interest?
Generally, no. Interest on loans and advances is exempt from GST under the applicable GST framework, subject to the relevant exceptions.
Does GST increase personal loan EMI?
GST charged on a separate processing or service fee does not normally increase the scheduled EMI because the GST is not charged on the regular loan interest component.
How do I calculate GST on a personal loan processing fee?
Multiply the taxable processing fee by the applicable GST rate. For example, if the processing fee is ₹8,000 and GST is 18%, the GST would be ₹1,440.
Can GST be avoided on a personal loan?
You cannot simply avoid GST on a taxable service charge. However, you may reduce the overall cost by comparing lenders and choosing an offer with lower or waived applicable fees.
Naina Rajgopalan
Naina Rajgopalan has a thing for numbers and a deep fascination to learn about all things finance. She's been money-wise from a young age and has always shared her knowledge and tips with those around her. Being a part of the content team at Freo, a neobank that offers flexible and customised financial products, along with benefits such as insurance on balance, safe & secure banking, and so on, Naina stays updated with the latest of what happens in the banking and fintech industries. She has taken upon herself to share her knowledge with readers across all walks of life to help them manage their finances and budgets better, so they can make better decisions while spending, borrowing, investing and saving.
