Since the implementation of the Goods and Services Tax (GST) in 2017, financial institutions have been charging a service tax of 18% on their services, and personal loans are no exception. Banks charge 18% GST on personal loan processing free. So, how does GST on personal loans affect you? Does it increase the EMI amount?
This blog gives you a clear idea about how GST on loans can affect your cost of borrowing and how to save on GST charged on personal loans. Read on!
Before the “one nation, one tax” approach, lenders used to charge a service tax of 15% on personal loans. Currently, a GST of 18% is levied on personal loan processing fee and loan prepayment charges. The GST component on personal loans increases the overall cost of the loan.
However, borrowers should know that GST only impacts certain components of a personal loan. It does not affect the interest charged by financial institutions or the EMI and principal amount. The components it impacts are as follows:
Depending on the amount you borrow and your credit score, a processing fee is levied on personal loans. Earlier, a 15% tax was applicable on this fee, but now GST of 18% is applicable.
Usually, financial institutions charge a processing fee of 2%-3%, and on top of this, you will be charged a GST rate of 18% on this fee. This is a 3% jump from the previous tax rate.
GST is applicable on any prepayment or foreclosure charges that a borrower incurs while foreclosing their personal loan. Prior to GST, if one wished to repay the entire loan amount before the tenure, they had to pay a prepayment charge + 15% service tax. This charge was decided based on the number of EMIs one had paid and usually ranged from 2% to 5%. However, if you decide to pre-close your loan now, it will cost you a prepayment charge + 18% GST.
Additionally, GST is also levied on bounce charges, penal interest and charges on outstation collection. That said, with the implementation of GST, the tax system has become uniform, and you do not have to pay numerous taxes on different loan components.
Let’s look into the quantitative changes brought by the implementation of GST with the help of an example.
Let’s say you need a personal loan of Rs.10 lakh for your wedding. You go to a lender who charges a processing fee of 2% on the loan amount. Here’s how the table would look like:
|Bank fees for a personal loan of Rs.10 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 2% of the loan amount||Rs.20,000||Rs.3,000||Rs.3,600||Rs.600|
As you can see from the above table, Rahul had to pay Rs. 600 extra on the processing fee after the implementation of GST.
Now let’s consider that after paying a few EMIs, Rahul received a promotion and wishes to foreclose the loan. He is left to pay an outstanding amount of Rs.5 lakh and his lender charges a prepayment charge of 3% on this amount. Before and after the implementation of GST, Rahul would incur the following costs:
|Bank fees for a personal loan of Rs. 10 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)|
|Prepayment fees of 3% of the outstanding principal amount of Rs. 5 lakh||Rs.15, 000||Rs.2,250||Rs.2,700||Rs.450|
Due to the introduction of GST on personal loans, you will have to pay an extra amount of Rs.450 for prepaying his loan.
Although GST has no substantial influence on the loan amount, it can affect the prepayment penalties, late payment fees and other charges that are associated with personal loans.
Here are two ways you can reduce your GST payment on personal loans:
To make it simpler for you to understand the impact and changes that GST brought to personal loans, have a look at this table:
|Components||Before GST||After GST|
|Interest rate, EMI, loan amount||Depended on the lender and varied according to your credit score||GST is not applicable for this component.|
|Processing fee||A service tax of 15% was levied on the processing fee.||GST of 18% is levied on the processing fee.|
|Prepayment charge||A service tax of 15% was levied on prepayment charges.||GST of 18% is levied on prepayment charges.|
|Documents required||Basic KYC documents and income proof documents were required. A GST certificate was not required.||Basic KYC documents, a GST certificate, and additional documents are required while applying for a personal loan for business.|
|Eligibility criteria||Varied across lenders||No change|
The introduction of the Goods and Service Tax brought significant changes to the tax structfure. Understandably, borrowers were initially worried about the impact of GST on loans and the additional costs associated with it.
However, it is crucial to note that GST for personal loans is only applied to certain components of your loan and in no way affects your loan amount.
If you choose a lender wisely, the additional costs brought by GST will not seem extravagant. If you want a personal loan at competitive interest rates and flexible EMIs, download the Navi app now and get cash loans up to Rs.20 lakh.
Ans: As the rate of GST levied on personal loans is fixed at 18%, there is no way to remove or reduce it. However, as GST is applicable on certain components of loans, you can opt for a lender offering lower processing fees and prepayment charges.
Ans: Most financial institutions levy prepayment charges between 2%-5% on the outstanding loan amount. Yet, there are cash loan providers like Navi, which charge no prepayment fee. Note that prepaying your loan can improve your credit score. Accordingly, if you have the financial capacity, you may consider prepaying your loan.
Ans: Only self-employed individuals applying for a personal loan for a business need to furnish a GST certificate. For individuals opting for a personal loan, there have been no changes regarding the documents required before and after GST implementation. Thus, they need to provide only the documents mentioned by their respective lenders.
Ans: Given the unsecured and short-term nature of personal loans, lenders often charge high-interest rates and additional costs. Thus before applying for this loan, consider your financial needs, income, repayment capacity, and make sure to choose a suitable lender. Furthermore, check whether you have the required documents and whether you meet the eligibility criteria.
Ans: Fortunately, the EMI amount is left untouched after the implementation of GST. Even though you will incur a higher cost on your personal loan, it will not be because of any changes in EMI paid. Thus, your loan amount is not directly impacted by the introduction of GST.
Ans: Yes, a GST of 18% is applicable on the loan processing fee. The fee is a percentage of the loan amount, which can range from 2% to 3%. Moreover, an 18% GST is also applicable on the prepayment charges if you wish to repay the entire loan before the end of the loan tenure.
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