When we need funds to manage some big or unexpected finances, most of us take a personal loan to arrange for the money. Personal loans can be used for various purposes without a specific end-usage, and you can avail of them without needing any collateral, so they are a popular credit instrument for almost everyone. You can use a personal loan to fund your education, pay for your dream wedding, expand your business, renovate your house, buy a car, or do anything else, and it is easy to repay personal loans through monthly EMIs.
A few years ago, the Indian Government introduced GST, Goods and Service Tax, which replaced the older indirect tax systems. GST is also an indirect tax that replaces VAT, excise duty, service tax, etc. Every value addition is subject to the government’s multi-stage destination-based GST tax.
People often ask how the GST affects personal loans and whether there is any GST on personal loans. This blog discusses all the questions regarding the impact of GST on personal loans, how it works, whether it has made personal loans more expensive, and more.
Is GST Applicable on Personal Loans in India?
When you apply for a personal loan at any bank or financial institution, remember that GST is charged on the service rendered by the lender. So, in a way, GST for personal loans is applicable only to a few components of your personal loan, and it does not affect the total amount of your loan. The interest rates, EMI amount, and principal will not be affected by GST.
Therefore, GST is applicable to certain components of personal loans in India.
Impact of GST on a Personal Loan
GST was implemented on 1 July 2017 in India. Before that, personal loans were subject to a service tax of 15%. But now, the GST on personal loans is 18%.
However, as discussed above, since GST is charged for the services provided by banking and financial institutions, it is imposed on processing fees, prepayment charges, and any other charges paid by the customer to the lender. GST is not charged on loan repayment or interest paid. Since loan repayment and interest are major components of a personal loan and GST is not applicable to those, the impact of GST on personal loans is not very high.
What Components of a Personal Loan are Affected by the GST?
It is important to understand the impact of GST on personal loans to know how it will affect the cost of your borrowing. The following are the components of a personal loan which are affected by GST:
- Processing Fee: The GST on personal loans is mainly charged on the processing fees. The GST on personal loan processing fees is charged at 18%, and since the process fees differ from lender to lender, the amount will depend on the lender you select.
- Loan Amount: GST does not directly affect the loan amount. However, since GST is charged on the processing fees, the loan amount can affect the processing fees. With a higher loan amount, the processing fees would also increase.
- EMI: GST is not applicable on the repayment of loans through EMI.
- Loan Tenure: GST does not affect the loan tenure, the period over which the personal loan is repaid.
- Prepayment or Pre-Closure Fees: Personal loans have to be repaid within a predetermined period. However, most lenders allow customers to repay the loan earlier, known as foreclosure of loan, and charge a small fee for providing this service. Since it is a service provided by the lender, GST on personal loan foreclosure is applicable at 18% of prepayment or pre-closure fees.
- Late Payment: When you default on your EMI payment or are late in paying the instalment, banks charge you a late payment fee or penalty. This late payment fee is also applicable to GST at 18%.
Pros and Cons of GST on Personal Loans
GST changed the Indian financial landscape and also affected the personal loan market. While GST has many advantages for personal loans, it also has a few drawbacks.
Pros of GST on Personal Loans
- Uniform Tax Structure: The GST has simplified the tax code by doing away with several indirect taxes and fostering a more consistent and open atmosphere.
- Less Tax Evasion: Since the introduction of the GST, companies have found it more difficult to avoid paying taxes, which has increased government revenue.
- Lower Total Cost: In certain instances, GST has decreased the total cost of goods and services, which may help borrowers in a roundabout way.
Cons of GST on Personal Loans
- Increased Processing Fees: GST is charged on the processing fees for personal loans, which increases the initial cost of obtaining a loan.
- Higher Interest Rates: Though interest rates are not directly affected by GST, the increased cost for lenders due to GST may cause them to charge slightly higher interest rates on personal loans.
- Complexity: GST is a relatively new concept, and understanding its complexities and its impact on personal loans can be a little difficult for borrowers.
How to Reduce the GST Charged on Personal Loans?
The GST paid on any personal loan mainly depends on the processing and prepayment charges. These charges differ from lender to lender, and it is important to do thorough market research before applying for a personal loan. A few ways to reduce the GST payment on personal loans are:
- You can select a bank or financial institution that charges a lower processing fee and penalty for delaying EMI payments.
- You can select a bank or financial institution with a low pre-payment fee on GST to help you save money.
- Avoid late payments. If you default on your EMI payments, you will have to pay a penalty, and GST will be charged on such fees.
Can you Avoid GST on Personal Loans?
You cannot legally avoid GST on personal loans, but you can lower the impact of GST on personal loans. You can do so by opting for lenders who charge a lower processing fee and other charges to reduce the GST cost.
Conclusion
With the introduction of GST, there was a significant shift in our country’s taxation system. It is essential to understand the impact of GST on personal loans to make more informed and conscious financial decisions and reduce the cost of borrowing as much as possible. Since GST on personal loans is charged only on a few components of the loan, like processing and prepayment fees, the amount is not very high. Still, it is best to know about all the charges, the impact of GST on personal loans, and how to reduce the costs of your borrowing.
