Understanding the Impact of GST Rate on Personal Loans: A Comprehensive Guide

Getting a personal loan is an easy and fast way to procure money for your needs. You can avail the money online and that too without pledging any collateral. You can take instant loans up to ₹5 lakhs in 5 minutes from the Zype app. 

Before taking a loan, you must know all the expenses that come with it. Usually, people only focus on interest rates but there are other charges too that you shouldn’t ignore like processing fees, prepayment charges and GST. In this blog, we’ll dig deep into the impact of GST on loans.

What is GST?

The full form of GST is Goods and Services Tax. It is an indirect tax that replaced many indirect taxes in India (like service tax, excise duty, VAT, etc) when it was implemented on 1st July 2017. As the name suggests, it is a tax on goods & services which are sold domestically for consumption. The advent of GST in India simplified the taxation system. As a result, it made the taxation on personal loans straightforward and transparent. This has led to more tax compliance which has had a positive impact on the Indian economy.

Impact of GST on Personal Loans 

Before GST was implemented in India, a service tax of 15% was levied on personal loan processing fees. When GST was introduced in July 2017 in India, the taxes on financial services changed to 18%. And since processing fees for personal loans come under financial services, that tax on it increased further by 3%. 

If you are wondering whether the GST on loans also increases interest rates, the answer is no. The interest rate levied on your personal loan is determined by other factors like your credit score, repayment history and credit policy of the Bank or NBFC.

Also Read: Why Opting For an NBFC Personal Loan is a Better Option?

How GST affects different components of a Personal Loan 

GST on loan Processing Fees 

To give you a loan, a lender incurs many kinds of costs during the processing and approval of a loan application. To cover these costs, Banks and NBFCs charge a one-time processing fee. This processing fee is usually a certain percentage of the loan amount. A GST rate of 18% is imposed on the processing fee of the loan.

GST on Prepayment Charges

Prepayment charges are a type of penalty that a personal loan borrower is liable to pay if they want to pay off the loan amount before the loan tenure. Since this is also a service provided by lending companies, you are charged an 18% GST on the penalty amount.

Is it possible to avoid GST on Personal Loans?

No, it is not possible to avoid paying GST on personal loan processing fees. The GST rate of 18% is usually deducted from the disbursed loan amount. You can reduce the GST amount by getting a personal loan with a low-processing fee which would result in a low GST charge.

Also, you can avoid GST charge on prepayment charges if the loan company does not charge this penalty. 

Personal Loans Before and After GST 

The advent of GST reshaped the indirect tax system in India. Let’s have a look at the changes it had on personal loans – 

Different aspects of Personal Loans

Pre-GST

Post-GST

Processing fee of personal loans

15% service tax was charged on the processing fee.

18% GST is levied on personal loan processing fees

Foreclosure charges

15% service tax was levied on prepayment penalty.

18% GST is charged on prepayment charges.

Required documents

Loan companies usually ask for identity proof, address proof and income proof.

Loan companies ask for identity proof, address proof and income proof. They could also ask for a GST certificate to give a personal loan for a business.  

How to Calculate GST on Personal Loans? 

Now we know that GST in personal loans is limited to specific charges. There is no GST on the loan amount. Here is the formula to calculate GST on any such fee in India –

GST amount = Fee amount x GST Rate/100

Let’s understand this with the help of an example. Suppose you got a personal loan of ₹5 lakhs from Zype app. For the same, you are charged a processing fee of 2% or ₹10000. The GST rate is 18%.

So, 10000 x 18/100 = ₹1800.

Hence, the GST on the processing fee would be ₹1800.

Also Read: Personal Loan Tax Benefits | Tax Deduction & Tax Exemption

Frequently Asked Questions

Is There Any Impact Of Gst On The EMI (Equated Monthly Instalment) Of A Personal Loan?

While the GST on certain charges like processing fees adds to the overall cost of the loan, it does not directly impact the EMI of a personal loan

Can Gst Rates On Financial Services Change In The Future?

The government can change the GST rate on financial services as they review and revise the policies based on many factors like the state of the economy, inflation, fiscal deficit, government priorities, etc.

Are There Any Other Taxes Or Charges Associated With Personal Loans?

There are no taxes on the loan amount. The fees and charges you should check on personal loans are interest rates, processing fees, prepayment penalties and late payment fees.

Can Gst Be Applicable To Other Financial Products Or Services?

Yes, many financial services attract GST in India like credit card annual fees, Forex card issuance, stock broking services, etc. You can get the complete list on the official website of the Central Board of Indirect Taxes and Customs (CBIC).

Are There Any Tax Implications On The Interest Paid On Personal Loans?

If you use your personal loan amount for certain situations like home renovation and business purposes, there is a possibility that the interest you pay on your personal loan can be deducted from your taxable income.

Can Changes In Gst Rates Affect Personal Loans In The Future?

Yes, an increase in the GST rate could increase the cost of a loan as GST is levied on personal loan service charges like processing fees and prepayment charges.

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