Personal loans have been a popular credit instrument for funding people’s big-ticket expenses. You get immediate access to funds without pledging collateral, and you can repay the loan through monthly instalments. But with GST replacing the country’s old tax system, people are wondering about the impact of GST on banking services. They are wondering what the GST on loans is. Whether availing personal loans have become expensive. We will answer all these questions in this blog. So, read on.
What Is GST?
GST, short for Goods and Service Tax, is an indirect tax the Indian Government introduced to replace old indirect taxes like excise duty, VAT, services tax, etc. GST is a multi-stage destination-based tax that the government levies on every value addition.
Impact of GST on Personal Loans
Before the Indian Government introduced GST on 1st July 2017, personal loans attracted a service tax of 15%. But with the introduction of the new system, GST on loans went up by 3%. So, borrowers availing of personal loans also bear the GST component of 18%.
The introduction of higher GST on loans has made personal loans more expensive than they were earlier. But still, personal loans are a better option to access additional funds without pledging collateral.
Breakdown of GST on Different Components of a Personal Loan
Here is a breakdown of how tax is levied on different components of a personal loan under GST:
1. GST on Personal Loans’ Processing Fees
When a lender accepts a loan application, it bears some administrative costs. You pay the cost of sanctioning a loan in the form of loan processing charges. Since the processing of a loan is a financial institution’s service, the processing fee attracts a GST of 18%.
For instance, you borrow a personal loan of Rs 1,00,000, and the processing fee is 4%. Then, the processing fee pre-tax amount will be Rs 4,000. And it will attract a GST of 18%, i.e., Rs 720. So, you will pay a processing fee of Rs 4,720 after tax.
2. GST on Personal Loans’ Prepayment Charges
Although a personal loan comes with a set repayment tenure, most lenders will allow borrowers to repay the loan in part or full early. In return, they charge a minor penalty called a prepayment fee. Loan prepayment is also a service that financial institutions offer, so the fee includes a GST component.
So, if a lender charges a prepayment fee of 3% on a personal loan of Rs 1,00,000, it will amount to Rs 3,000, and with GST at 18%, you will pay Rs 3,540 as a prepayment fee in total.
3. GST on Personal Loans’ Interest
Interest rate is the biggest factor influencing people’s decision to borrow personal loans from one lender over the other. So, what is GST’s impact on interest rates? – GST does not affect the interest you pay against your loans.
Unlike loan prepayment and processing, interest is not a service lenders offer borrowers. Instead, it is an amount that borrowers pay at a predetermined rate for the loan they avail. So, no GST is levied on the interest you pay on the personal loans.
Ways To Avoid Paying GST on Personal Loans
There is no way to avoid paying GST on loans as it is already included in the final amount you pay at loan processing and prepayment fee. However, it is important to note that the tax amount depends on the fee lenders charge. So, you can avoid paying higher GST by opting for a lender with comparatively lower loan processing and prepayment charges.
Now that you know what GST is and the impact of GST on banking services, you can save a significant amount for the next time when you need to finance your expenses.
At Tata Capital, we offer personal loans of Rs 35 lakhs at attractive interest rates. We have the lowest processing fee, and we do not charge penalties on part prepayment of loans, reducing your financial burden. Visit our website to know more.