Financial institutions are now required to add an 18% service tax to all of their services since the Goods and Services Tax (GST) was implemented in 2017. Personal loans are also no different. How will GST on personal loans impact you is the question. Will the EMI payment go up as a result? Thankfully, it does not significantly raise the debt for customers. You must be aware of some fees and taxes before choosing to take out this loan.
This article explains in detail how the GST on personal loans might affect your borrowing costs and ways to reduce the GST on personal loans. Read on to understand more about personal loan tax benefits!
Table of Contents
Introduction
In India, Goods and Services Tax, or GST, is an indirect tax that has superseded other indirect taxes, including the excise duty, VAT, and services tax. The Goods and Service Tax Act was approved by the Parliament on March 29, 2017, and became effective on July 1.
In other words, goods and services are subject to the Goods and Services Tax (GST). Every value addition in India is subject to the comprehensive, multi-stage Goods and Services Tax Law, depending on the destination. A single domestic indirect tax law, known as GST, applies to the entire nation.
The tax is collected at every point of sale under the GST system. Sales within one state are subject to both central and state sales taxes. The Integrated GST is liable for all interstate sales.
Let’s examine this article’s explanation of the personal loan tax benefit in greater detail.
What Is The Impact Of GST On A Personal Loan?
Personal loans assist with short-term financial needs and are free of collateral. However, the introduction of GST has caused some borrowers to wonder how it will affect the cost of taking out this loan.
Before this “one nation, one tax” strategy, borrowers seemed to find a 15% service tax on personal loans more alluring. This loan appears to be more expensive due to raising the tax component to 18%.
But borrowers should be aware that the GST only affects a few parts of a personal loan. It does not impact the financial institutions’ interest rates, EMI payments, or principal balance. It has an effect on the following elements:
Processing Fees
A processing fee is applied to personal loans, depending on the amount borrowed and your credit rating. Previously, a 15% tax was applied to this fee; currently, an 18% GST is in effect. Financial institutions often charge a processing fee of 2% to 3%, and you will also be charged GST at an additional rate of 18%. This represents a 3% increase above the prior tax rate.
Prepayment Or Pre-Closure Charges
Any prepayment or foreclosure fee that a borrower must pay is subject to GST. Before the introduction of the GST, a prepayment fee plus 15% service tax had to be paid if you wanted to pay off your loan in full before the term was over. This fee, which typically runs from 2% to 5%, is determined based on how many EMIs have been paid. However, there will be a prepayment fee plus 18% and GST if you decide to pre-close your loan.
In addition, GST is assessed on out-of-state collection fees, punitive interest, and bounce fees. The tax structure has become unified since the introduction of the GST, so you do not need to pay several taxes on various loan components.
EMI
Although the cost of a personal loan GST rate has somewhat increased, the borrower is not overly affected by the change in price. Thankfully, GST has not applied to the EMI portion. GST does not significantly impact personal loan EMIs because they were previously exempt from service tax and are currently exempt from GST. As a result, GST will not impact the EMI for personal loans.
What Components Of Personal Loans Are Affected By GST?
The following are the components of GST on personal loans:
GST On Loan Processing Fee:
The service of loan processing is offered by the bank or financial institution. GST is consequently calculated using the processing cost. The actual processing fee will be used to calculate the amount of GST payable.
For instance, let’s say you obtain a personal loan for Rs. 1,000,000 with a 4% processing fee.
The processing fee would be Rs 4,000, and after applying GST at 18%, the total would be Rs 4,720.
GST on Personal Loan Foreclosure:
Prepayment or pre-closing fees, or The bank or financial institution provides you with a service to help you complete the transaction when you prepay or foreclose a loan.
Prepayment fees and penalties on loans are therefore subject to GST.
For instance, if the bank charges a 3% prepayment fee on a personal loan of Rs. 100,000, the prepayment fee would be Rs. 3,000, and the total, including GST of 18%, would be Rs. 3,540.
Although the amount isn’t enormous, as you can see, there are ways to lower the amount of GST you pay on your personal loan if you’re still concerned.
Personal Loan Differences Before And After GST
Look at the following table to better understand the effect and changes that the GST will have on personal loans:
| Components | Before GST | After GST |
| Interest rate, EMI, and loan amount | Depend on the lender and your credit score | GST is not applicable |
| Processing fee | 15% service tax on the processing fee | 18% GST on the processing fee. |
| Prepayment charge | 15% service tax on the prepayment charges | 18% GST on prepayment charges |
| Documents required | Basic KYC documents and income proof documents | Basic KYC documents, a GST certificate, and additional documents |
| Eligibility criteria | Vary across lenders | No change |
How Do You Apply For A Personal Loan With Loaney?
You must have the following to avail a loan with us:
- You must be a citizen of India.
- You must be at least 18 years old.
- Your PAN number and Aadhaar card must be ready.
- Your mobile phone must be active and linked to your Aadhaar.
You only need to register by going to the loaney website. You must complete all the required fields to proceed. You must be sure the information you are entering is accurate and true. We guarantee your secrecy because protecting your data is our top priority. A loan calculator is available online on our website for your convenience and will assist you in determining how much money you will need and for how long. It will also make it simple to choose when and how much you will need to return.
Once your application has been submitted, we will quickly inform you of our decision and offer a loan in the manner that suits you the most.
No matter the hour or day of the week, we’ll assist you with your financial problem in the most effective way possible.
How Does Availing Of A Personal Loan Help Reduce GST?
The personal loan GST rate is determined by the processing and prepayment fees. As a result, taking out a loan with a lower processing fee or a prepayment penalty is the simplest way to save money on GST. Various loan options should be compared for the best results.
Striking a balance between all the fees imposed on a personal loan is crucial, but paying attention to the loan’s interest rate is also necessary.
Lenders are offering personal loans in the nation that have low-interest charge rates and require little documentation.
The loan’s reasonable and competitive interest rates and other costs can help you save money on GST, as indicated in the examples below.
- Low-interest personal loans are available with monthly rates as low as 1.33 per cent.
- On such comparison websites, personal loans with no prepayment penalties can also be discovered; however, there may be a few restrictions, such as the fact that you can only foreclose on a loan after making three or six EMI payments.
- Since there is no prepayment fee, no GST will be added to the transaction.
A respectable 2% of the total loan amount is the starting point for processing fees. You will pay less GST because processing costs are significantly less expensive there.
Final Thoughts
So, this was all about personal loan tax benefits with the introduction and implementation of the Goods and Services Tax. It makes sense that borrowers are concerned about how the GST would affect personal loans and the extra costs it will bring. It is important to remember that GST for personal loans only applies to specific parts of your loan and has no bearing on the overall amount of your loan.
The additional expenses imposed by GST won’t appear excessive if you pick a lender prudently. Visit Loaney website right away to secure a loan up to Rs. 20,000 at affordable interest rates and flexible EMIs.
Frequently Asked Questions
How do you calculate GST on a personal loan?
- The actual processing fee will be used to calculate the amount of GST payable.
- Assume, for instance, that you take out a personal loan for Rs. 50,000 with a 4% processing fee.
- The processing fee would be Rs 2,000, with the first Rs 2.000 subject to GST at 18%, making the total Rs 2,360.
Is GST applicable on loan EMI for business purposes?
Yes, an 18% GST applies to the loan processing cost. The cost, which might be between 2% and 3% of the loan amount, is a percentage. If you want to repay the entire loan before the loan’s term is over, an 18% GST is also charged on the prepayment fees.
Does GST have a direct impact on the EMI amount?
Thankfully, even after the introduction of GST, the EMI amount is unaffected. You will pay more for your loan, but it won’t be because your EMI payments have changed. As a result, the introduction of GST has no direct effect on your loan amount.
Do I need a GST certificate while applying for a personal loan?
The only people who must provide a GST certificate when applying for a personal loan for a business are self-employed. There have been no modifications to the documentation requirements for people choosing personal loans before or after the establishment of the GST. Therefore, customers simply need to submit the paperwork requested by their lenders.
Is there a way to reduce the additional GST costs on personal loans?
Since the GST imposed on personal loans is 18%, it cannot be eliminated or reduced. However, because GST is charged on some loan components, you can choose a lender with reduced processing costs and prepayment penalties.