What is the Impact of GST on a Personal Loan?

Goods or Services Tax or GST has replaced multiple Indirect Taxes in India and revolutionized the entire tax system of the country. It is one tax that is levied at every point of sale, making it a multi-stage tax. Thus it is very important to understand the implication of GST at each stage of sale/purchase.

Here in this article, we will explore the impact of GST on your Personal Loan.

First, understand the product Personal Loan.

A Personal Loanis a loan which an individual acquires from a bank/NBFC to fulfill their personal needs. These personal needs may include medical expenditures, education fee, marriage expenses, and many more.

Before you apply for a Personal Loan, you must learn about the loan amount, interest rate, loan tenure, EMI and other charges involved. Whether you go for a Yes Bank Personal Loan or Citibank Personal Loan, you will find a competitive offer. Both qualify as a preferred choice of Personal Loans.

While you can easily calculate loan EMI, by feeding in the loan amount, interest rate and tenor on the EMI calculator on any of the bank websites or MMM EMI Calculator, it would not be feasible to calculate the GST on your Personal Loan through online calculators.

Herein it is imperative to understand how GST works on Personal Loan?

GST on Personal Loan

Earlier indirect tax levied on credit products was 15%, which is revised as 18% under the GST. So, GST has raised the cost of loan to the consumers. But the difference is marginal in nature.

1. Even though the tax percentage has increased, it does not affect the monthly EMI. GST is not applied on the loan repayment; rather it applies to the services which the bank provides to a borrower while processing the loan amount.
2. The first service from the bank is the processing of the Personal Loan, and for processing the loan, the amount bank charges an amount in the form of processing fee. The processing fee varies from bank to bank. However, generally, the processing fee ranges from 1% to 3% of the loan amount. Now, 18% GST is levied on this charge, which was 15% in the past.
3. Other than the processing fee there are other fees or charges implemented by the bank which borrower has to bear, in certain conditions. Pre-payment fee is another one which the borrower has to bear. Though it will only be levied when the borrower wants to close the loan account earlier, than the end of the loan tenure.

The borrower can apply for foreclosure of the loan account. As, the bank provides a service to the borrower to close the loan account early, it charges a pre-payment fee or foreclosure fee for this service. The borrower usually pays up to 5% of the prepayment fee on the outstanding balance.

Let’s understand the impact of GST on Personal Loan with an example.

Say, if you Apply for a Personal Loan of Rs 9 Lakh for 5 years at 15% p.a. The loan processing fee at 3% on the loan amount will be Rs 27000. Here, GST will be Rs 4860 (at 18% of processing fee) as against Rs 4050 (at 15% of processing fee). The impact of GST on processing fee would be Rs 810.

Next, say the borrower wants to prepay the loan after 3.5 years when he has an outstanding balance of Rs. 3 Lakh at 4% Prepayment fee.

Now with current rate of 18% GST, the prepayment charge will be 18% of prepayment fee. Here prepayment charge will be Rs 12000 (.04 X Rs 3Lakh). The GST levied will be Rs 2160 (.18 X 12000). Earlier the indirect tax on the same loan was calculated as, Rs 1800 (.15 X 12000).

So, the impact of GST on Personal Loan repayment will be net Rs 360 in this example. The net GST on different products would vary from bank to bank.

As there is no connection with the loan amount and interest part, the net impact of GST on Personal Loan is marginal. You certainly do shell out more at the current tax rates, but it would not pinch your pocket.

Likewise, the impact of GST on other banking and credit products is low too. It would not affect the EMI, but it does affect various other fees on your loan.

You can calculate GST on each transaction at 18%. In most cases the net difference is a few hundreds only.

Hope you would not search for GST calculator before applying for the loan. You can find out the net GST on the bank service as processed above.