If you need money urgently, personal loans can be an excellent choice. Nevertheless, implementing the Goods and Services Tax (GST) has affected interest rates connected with personal loans. As a result of the higher taxes paid by lenders, borrowers may face increased interest rates and fees. For example, banks charge an 18% GST on processing fees for personal loans. The GST’s potential impact on private loans could affect various aspects, including your Equated Monthly Instalment (EMI). Therefore, this blog post will explore the basics of the GST and its potential implications for personal loan borrowers.
What is GST?
GST or Goods and Services Tax is a type of indirect tax that is applicable to the supply of goods and services in India. This tax has been introduced to replace the previous indirect taxes like service tax, VAT, and excise duty. It is a value-added tax levied on the value added to the goods or services at each stage of the supply chain. Ultimately, the end consumer bears the tax burden. Businesses involved in the supply of goods or services must calculate and pay GST to the government. Implementing GST has brought a standardized tax structure and simplified the tax compliance process for businesses.
Impact of GST on Personal Loans
Until the implementation of GST on July 1, 2017, Indian personal loans were subject to a 15% service tax. With the introduction of the new system, the GST on loans increased by 3%, causing personal loan borrowers to bear an additional 18% GST component. Despite this increase, personal loans remain popular for accessing funds without collateral.
Breakdown of GST on Different Components of a Personal Loan
1. Processing Fees
Personal loans incur a processing fee that varies based on the amount borrowed and the borrower’s credit score. Financial institutions generally impose a fee ranging from 2% to 3%. Previously, a tax rate of 15% was levied on this fee, but an 18% GST rate has now replaced it. The new GST rate is a 3% increase from the previous tax rate.
2. Prepayment or Pre-closure Charges
While personal loans typically come with a fixed repayment period, borrowers can often make partial or full prepayments before the due date. However, lenders charge a minor penalty called a prepayment fee for this service. This fee also includes a GST component since loan prepayment is a service offered by financial institutions.
For instance, if a lender imposes a prepayment fee of 3% on a personal loan of Rs 1,00,000, the fee amounts to Rs 3,000. Adding the 18% GST rate, the total prepayment fee would be Rs 3,540.
3. Interest
It’s not possible to escape paying GST on personal loans since the tax is already included in the final amount paid, including processing and prepayment fees. Nevertheless, it’s worth noting that the tax amount depends on the fees charged by the lender. To avoid paying higher GST, choosing a lender that imposes lower loan processing and prepayment fees is advisable. By doing so, you can minimize the GST you’ll be required to pay.
Final Thoughts
Understanding GST on personal loan prepayment penalties and expenses can be a challenge. Considering all the factors when deciding about your loan is essential to ensure you get the best deal possible. With the proper knowledge, you can know what you’re getting into and avoid surprises. Speak to an accountant or financial planner if you have questions or need more information about this complex topic.
