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Tata Capital > Blog > Personal Use Loan > What Is GST on Personal Loan? Rate, Charges, Impact & Working in India

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What Is GST on Personal Loan? Rate, Charges, Impact & Working in India

What Is GST on Personal Loan? Rate, Charges, Impact & Working in India

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 installments. 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 rate on personal loan​s is. Whether availing personal loans has 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.

How GST Impacts 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 a higher GST rate on personal 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.

1. What is NOT Taxed (0% GST)

  • The principal amount: The loan amount you borrow is a financial transaction, not a service, so GST does not apply to it.
  • The interest rate: Interest is set as per RBI guidelines and is not treated as a service, so it is not subject to GST.
  • Your monthly EMIs: Since an EMI comprises principal and interest, both GST-free, your monthly repayment attracts no GST.

2. What IS Taxed (18% GST)

  • Upfront processing fees: The fee a lender charges to process your loan is a service and attracts 18% GST.
  • Prepayment and foreclosure charges: Fees for repaying your loan early are treated as a service and are subject to 18% GST.
  • Penalty and documentation fees: Late payment penalties, documentation, and similar charges are also taxed at 18%.

Current GST Rate on Personal Loan Charges

The current GST rate on loan fees applies to these types of charges:

Processing Charges

An 18% GST applies to the loan processing operational and administrative costs that the lender bears when providing the loan.

Prepayment Charges

Prepayment or foreclosure amounts are subject to 18% GST as well.

Other Associated Charges

Miscellaneous fees include documentation and renewal charges, mode swaps, and loan cancellation fees. All of these are subject to an 18% tax. Understanding the GST rate on personal loan charges can help estimate the total cost of the loan.

Is GST Applicable on Interest on Personal Loan?

Many borrowers ask, is GST applicable on interest on loan? Because the interest rates are predetermined according to RBI guidelines and agreed upon by the borrower and lender, charging interest is not considered a financial service. Thus, GST on interest on personal loan does not apply.

Note that GST on loan interest and principal amount is not applicable. Other miscellaneous charges, like processing and prepayment fees, renewal charges, and cancellation fees, can attract taxation, which can increase the final cost of the loan.

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, an 18% GST on processing fees is applicable.

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. No GST on loan interest is levied on personal loans.

Tips to Minimize the GST Impact on Personal loan

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.

1. Hunt for “Zero Processing Fee” Digital Campaigns

Lenders often run digital offers that waive or reduce processing fees. Since GST applies only to the fee charged, a nil processing fee means no GST on that component. Watch for these campaigns before you apply.

2. Leverage Your High Credit Score to Negotiate

A strong credit score gives you room to negotiate lower processing or other charges. A smaller fee means a lower 18% GST, which lowers your overall cost.

3. Opt for “Prepayment-Friendly” Lenders

If you plan to repay early, choose a lender with low or no prepayment and foreclosure charges. Lower charges mean less GST when you close the loan early.

4. Apply as a Registered Business Owner (Input Tax Credit)

If you are GST-registered and use the loan for business purposes, you may be able to claim input tax credit on the GST paid on loan charges, subject to eligibility. This does not apply to loans taken purely for personal use, so confirm with your tax advisor first.

5. Automate Your Repayments to Avoid “Penalty GST”

Late payment penalties attract 18% GST, so a missed EMI costs more than just the penalty. Setting up auto-debit for your EMIs helps you avoid these charges and the tax on them.

Advantages of GST on Personal Loans

GST has brought greater transparency and uniformity to the taxation of personal loan-related charges, helping borrowers better understand the overall cost of borrowing.

  • Simplified procedures: GST streamlines the tax process, making personal loan charges more efficient and transparent.
  • Uniform taxation: Replacing several older taxes with a single tax creates a more consistent tax structure and clearer costs for borrowers.
  • Potential cost benefits: A single, streamlined tax system can, in some cases, translate into more competitive fees.
  • Transparency for borrowers: With a fixed 18% rate on applicable charges, you can see exactly what tax you are paying and factor it into your loan cost.
  • Zero tax on core debt: No GST applies to your principal or interest, so the main cost of borrowing stays untaxed.

Disadvantages of GST on Personal Loans

While GST has improved transparency, it has also increased the tax burden on certain personal loan-related charges, which can raise the overall borrowing cost for some borrowers.

  • Increased taxation: GST at 18% is higher than the earlier 15% service tax, which raises the cost of applicable charges.
  • Transition challenges: The move from the old tax system to GST created initial confusion as lenders and borrowers adjusted.
  • Varied interest rate impact: The overall effect on borrowing cost can differ from one borrower to another, depending on the fees involved.
  • Increased penalties for late payments: Penalties and late payment charges are subject to 18% GST, so missing an EMI payment costs more than just the penalty itself.
  • Reduced loan affordability: The added processing and other fees raise the effective upfront cost of the loan.
  • Added complexity: Borrowers need to account for GST across several fee components when working out the true cost of a loan.

Conclusion

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.

You can also download the Tata Capital personal loan App now and experience all the services of Tata Capital at your fingertips 24X7.

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FAQs

Is GST applicable on loan interest for personal loans in India?

Charging interest is not considered a financial service. It is a financial transaction between the borrower and lender, at rates permitted by the Reserve Bank of India (RBI) guidelines. Thus, GST on interest on loan, similar to GST on the principal amount, is non-applicable.

What is the GST rate on personal loan processing fees?

An 18% GST applies to personal loan processing fees. Loan processing is considered a financial service and covers administrative and operational tasks, along with their associated costs. These processing charges are thus subject to taxation under the current GST rules.

Is GST charged on loan EMI payments?

Personal loan EMI payments include the principal amount and the calculated interest amount. Because both amounts are fully exempt from GST-based taxation, monthly EMI payments are not affected by GST rates. The borrower only has to pay the agreed-upon loan amounts.

Does GST apply to loan prepayment or foreclosure charges?

GST loan charges apply to personal loan prepayment or foreclosure charges. These charges are financial services provided by the lender and attract an 18% GST. As a result, if the borrower wants to close the loan early, the overall cost of the foreclosure increases.

How can I minimize the impact of GST on my personal loan cost?

Although GST cannot be avoided, it is possible to reduce its impact on personal loan costs. Negotiating lower base charges when applying for a loan, and comparing processing fees and foreclosure fees across lenders, can be helpful.

Is GST applicable to penal charges or late payment fees on personal loans?

The GST on interest on loan and the principal amount remains zero, but not on other types of charges. Penal charges are considered a financial service. Penal charges such as late payment fees on personal loans are subject to GST at the standard rate of 18%. The borrower must account for this additional tax when calculating the total cost of their personal loan.

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