Owing to the unsecured nature and fast disbursal process, personal loans are a suitable option if you require funds on an urgent basis. However, before opting for this loan, one should know certain costs and taxes associated with it.
Since the implementation of the Goods and Services Tax (GST) in 2017, financial institutions have been charged a service tax of 18% on all their services. Keep reading to know how GST on personal loans can affect your cost of borrowing.
Personal loans can help you meet any of your financial requirements in the short term and are also collateral-free. Thus, it is obvious why borrowers across India find it to be a lucrative borrowing option. But the implementation of GST on personal loans has made the borrowers question its impact on the cost of availing this loan.
Before this “one nation, one tax” approach, a service tax of 15% on personal loans seemed more attractive to borrowers. Thus, increasing the tax component to 18% makes this loan appear more expensive.
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 charge that a borrower has to incur. 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 is decided based on the number of EMIs one has paid and usually ranges from 2% to 5%. However, if you now decide to pre-close your loan, 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.
To make it simpler for you to understand the impact and changes that GST brings to personal loans, have a look at this table:
|Components||Before GST||After GST|
|Interest rate, EMI, loan amount||It depends on the lender and varies according to your credit score||GST is not applicable for this component.|
|Processing fee||A service tax of 15% is levied on the processing fee.||GST of 18% is levied on the processing fee.|
|Prepayment charge||A service tax of 15% is levied on prepayment charges.||GST of 18% is levied on prepayment charges.|
|Documents required||Basic KYC documents and income proof documents are required. A GST certificate is not required.||Basic KYC documents, a GST certificate, and additional documents are required while applying for a personal loan for business.|
|Eligibility criteria||Vary across lenders||No change|
Also Read: Everything About Private Loans
Given the importance of GST on personal loans, borrowers should understand how the two work together. Let’s look into the quantitative changes brought by the implementation of GST with the help of an example.
Let’s say Rahul needs to avail of a personal loan of Rs. 10 lakh for his grand wedding. He goes to his chosen lender, who charges a processing fee of 2% on the loan amount.
This is what he would have to pay before and after the implementation of GST:
Before GST: Rs. 20,000 (2% processing fee) + Rs. 3,000 (15% service tax) = Rs. 23,000
After GST: Rs. 20,000 (2% processing fee) + Rs. 3,600 (18% GST) = Rs. 23,600
Thus, upon the implementation of GST, Rahul incurs an extra cost of Rs. 600 on the loan’s processing fee.
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:
Before GST: Rs. 15,000 (3% prepayment charge) + Rs. 2,250 (15% service tax) = Rs. 17,250
After GST: Rs. 15,000 (3% prepayment charge) + Rs. 2,700 (18% GST) = Rs. 17,700
Thus, due to the introduction of GST on personal loans, Rahul will have to pay an extra amount of Rs. 450 for prepaying his loan.
Also Read: Small Personal Loans
The introduction of the Goods and Service Tax brought significant changes to the tax structure. Understandably, borrowers are worried about the impact of GST on personal loans and the additional costs associated with it. However, it is crucial to note that GST 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. By downloading Navi’s mobile app, you can avail a personal loan of up to Rs. 20 lakh at competitive interest rates.
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 personal 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.
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