Understanding the Impact of GST on Personal Loan

A personal loan is a type of unsecured loan that is offered by Banks, NBFC etc. where the borrower is not required to put up any collateral for the requirement of funds.
People generally takes personal loan for wedding, vacation, home renovations or any other urgent financial need.With the introduction of the GST, it is very important to understand the implications of GST on personal loans because it is very essential for managing your financial objectives.

How we can minimize the Impact of GST on Personal Loans

When you take a personal loan there are two major charges on which GST is applicable :-

• Loan processing charges
• Prepayment charges

So, it is very important that the above charges should be minimal to reduce GST impact.
There is always scope for reduction in loan processing charges and Prepayment charges. So, when you are applying for a loan try to bargain in processing charges and Prepayment charges. In many cases, some banks & NBFCs also allow Nil prepayment charges.

This way availment of loans with lower loan processing and prepayment fees can help reduce the burden of higher GST payments.

We shall understand the charges that are applicable on personal loans and GST impact:-

1. Impact of GST on Processing Charges :-

When a borrower applies for a personal loan, banks/ NBFCs charge processing fees as financial institution also bears administrative costs, salary of credit manager/ marketing team etc. These expenses are passed on to the borrower in the form of processing fees.

Since this processing is considered a service provided by the financial institution. The GST Rate on processing charges will be 18%
For example, if you borrow a personal loan of Rs. 5,00,000 and financial institution charges processing charges @ 2%, then processing charges without GST will be Rs. 10,000.
So, GST will be Rs.1800 (Rs.1,00,000*18%), So you need to pay total processing charges including GST will be Rs.11,800.

2. Impact of GST on Prepayment Charges :-

Personal loans often offer borrowers the convenience of early repayment. But, it comes with prepayment charges. If the borrower wants to repay the loan before its tenure, the borrower have to pay prepayment charges plus GST.
Since this prepayment charge is considered a service provided by the financial institution. GST Rate on prepayment charge will be 18%

For example, You have taken a loan of Rs. 10,00,000. Now, as on date the outstanding balance is Rs. 1,00,000. Suppose, you want to prepay this amount and the prepayment charges is 2%. Then, prepayment charges will be Rs. 2,000.
So, GST will be Rs.360 (Rs.2,000*18%), So you need to pay total prepayment charges including GST will be Rs.2,360.

3. Impact of GST on Interest :-

Interest does not come within the criteria of GST. There is no difference where you are taking loans from Banks and NBFCs. Interest is always exempt from GST.

4. Impact of GST on Additional Charges:

GST also applies on other charges associated with loans like penalties on late payments and fees for bounced cheques etc.

FAQ’s

Q1. What is the GST rate applied to loans?
Ans. Loans in India are subject to a GST rate of 18%.

Q2. Does GST applicable on personal loans?
Ans. Yes, Loans in India are subject to a GST. It's important to emphasize that GST is not directly applied to the principal loan amount; instead, it is levied on additional services such as processing fees, loan charges, and other services provided by the lender.

Q3. Is there any liability for borrowers to pay GST on loan processing fees?
Ans. Yes, GST is applicable on loan processing fees. Therefore borrowers are required to pay GST.

Q4. Is there any liability on the borrower to pay GST on the interest accrued on loans?
Ans. Interest accrued on loans is not considered as a supply of goods or services. Hence GST is not applicable on the interest accrued on loans. GST is usually applied to processing fees, loan charges and other services provided by the lender. Therefore borrowers do not need to pay GST on the interest portion of their loans.

Q5. What is the applicability of GST on the bank interest earned by individuals?
Ans. GST is not applicable on the interest earned by individuals on bank deposits or savings accounts or recurring deposits as it is considered a part of the financial service provided by the bank which is exempt from GST.

Q6. How to calculate GST on the interest component of Loan EMIs?
Ans. Since GST is not applicable on the interest component of EMIs related to loans, there is no calculation involved for GST on interest.

Q7. What are the GST implications on loan transactions and related charges?
Ans. Loan transactions and related charges such as processing fees are subject to GST but the interest component and EMIs themselves are exempt from GST as they fall under the category of financial services.

Q8. Are credit card EMIs subject to GST?
Ans. Yes, according to the ruling in the case of Ramesh Kumar Patodia Vs Citi Bank by the Calcutta High Court, it's evident that GST is applicable to credit card EMIs.

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