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 from the Zype app up to ₹5 lakhs in 5 minutes.
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.
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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.
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?
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.
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.
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.
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.
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
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.
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.
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.
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).
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.
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.