GST on Personal loans – Processing Fees, Documents, EMI=change
A Personal Loan is an unsecured loan that can be availed for meeting various urgent fund requirements including medical expenses, travel, education, home care, and the like. As it can be availed easily online with basic eligibility criteria, Personal Loans have become a popular form for the masses. However, a borrower needs to be aware of the various taxes and charges associated with a Personal Loan like GST and the fees that may be affected by GST during handling your loan application or repayment.
What is GST on Personal Loan?
GST on Personal Loan refers to the 18% Goods and Services Tax charged only on loan-related fees such as processing fees, foreclosure charges, late payment penalties and other service charges—not on the principal amount or interest.
The Government introduced GST to simplify India’s indirect tax structure, and Personal Loans fall under the Banking and Financial Services category. Although GST is applicable to services linked with a Personal Loan, it does not increase your EMI or loan interest, since the tax does not apply to the borrowed amount or the interest you pay.
Components of Personal Loans Subject to GST
A clear classification of charges are subject to GST helps borrowers understand how GST affects different parts of a loan. Every borrower who avails a Personal Loan has to pay GST charges at the existing rate of 18%. This is added to certain fees on Personal Loans, such as loan processing charges, documentation, account statements, and loan cancellation charges. GST is levied on these services because they fall under the category of financial service. However, the loan amount or interest is exempt from GST, ensuring your EMI itself stays unaffected.
By knowing these components of a Personal Loan, borrowers can better calculate the loan cost and avoid surprises in the total loan payout.
Are Personal Loan EMIs and Interest Subject to GST?
Explain exemptions with legal/regulatory reasoning.
Personal Loan EMIs are exempt from GST, and so is loan interest. EMIs consist mainly of repayment of the principal amount and loan amount or interest, both of which are outside the scope of GST on loans. Even earlier, such loans attracted no service tax.
Under GST rules, charges that relate to the lending financial service itself can incur GST, but pure repayment obligations remain untouched. This keeps EMIs stable even after GST is applicable on connected services.
From a regulatory standpoint, the loan is a financial transaction, so GST does not apply to EMIs. Borrowers will not see their EMIs increase simply because GST applies elsewhere.
GST on Processing Fees, Documents & EMI
Lenders charge a processing fee for a loan granted to borrowers. This fee relates to the cost of handling your loan application, including a Personal Loan application. Normally, a fee of 2.5% – 3.5% of the amount of loan is charged. Since this falls under a taxable service, GST is applicable and is charged at the standard rate. This means the loan processing charges increase slightly as GST adds an additional amount.
GST is also applicable to documentation charges, duplicate statements, and similar administrative services. It also applies to processing fees and foreclosure charges under certain conditions.
However, GST does not impact your monthly EMIs. Since EMIs never attracted service tax earlier, they remain exempt from GST even today.
Borrowers who are self-employed and have Business Loans may be asked for GST registration details, depending on lender policy. For a Personal Loan, a GST certificate is usually not required.
GST on Foreclosure, Prepayment, Penal Charges & Other Fees
Breakdown with examples
When you close your loan or decide to repay the loan early, lenders may charge foreclosure fees or loan cancellation charges. These are considered taxable services, so such charges are also subject to GST. For example, if a lender charges Rs 4,000 as foreclosure charges, GST would add another 18%, increasing the payable amount. This also applies to Personal Loan foreclosure, penal charges for late payment, and certain administrative costs associated with Personal Loans.
Any service involved in disbursing and managing a loan, including managing a loan payout, may attract GST at 18%.
How GST Impacts Your Total Personal Loan Cost
Illustrations and practical takeaways
GST on loans mainly affects the loan cost through add-on fees, rather than EMIs. Since GST applies to services and not the principal amount, your instalments remain stable. But the overall loan cost becomes slightly higher due to GST added to processing, documentation, statement issuance, or prepayment charges.
To put it simply, GST simplifies taxation by bringing different Personal Loan fees under one rate. However, it can also make Personal Loans more expensive in some cases, especially when borrowers opt for frequent statements, foreclosure, or changes during the loan tenure or tenure of the loan.
Borrowers must know about GST on Personal Loans so they can avoid unnecessary charges. Being aware of how much GST applies to different services helps during decision-making when availing a Personal Loan or taking a Personal Loan. If someone has an outstanding loan, they should check which charges are charged on the loan and which are not.
Understanding the impact of GST rate on the rates on Personal Loan-related charges helps borrowers stay informed. This knowledge also allows them to avoid the disadvantages of GST on Personal Loan-related services.
Conclusion
GST for Personal Loans affects different parts of the borrowing process but does not alter the EMI itself. Many charges associated with a Personal Loan fall under taxable services and can increase the loan cost slightly, but borrowers can manage this better when they apply for a Personal Loan with awareness.
To know more about the impact of GST on loans, check out credible Personal Loan apps like Hero FinCorp. It is a fully digitised, user-friendly online loan platform that provides an instant Personal Loan of Rs 50,000 to 5 Lakh at an attractive Personal Loan interest rate starting at 19% per annum.
Frequently Asked Questions
Is GST charged on the principal amount of a Personal Loan?
No, GST is not charged on the principal amount of a Personal Loan. It only applies to certain service-related fees, keeping EMIs stable.
Does GST apply to the interest portion of Personal Loans?
Interest on Personal Loans is exempt from GST. Only service fees, like processing or prepayment charges, attract GST. Interest repayments remain unaffected.
Which Personal Loan charges attract GST?
Processing fees, documentation fees, account statement charges, foreclosure charges, and loan cancellation charges are subject to GST at the applicable rate.
What is the current GST rate on Personal Loan related fees?
The current GST rate on Personal Loan-related fees is 18%, applicable to processing, documentation, and certain administrative or prepayment charges.
Is GST applicable on Personal Loan EMIs?
No, Personal Loan EMIs are exempt from GST. EMIs cover principal and interest, both of which do not attract GST.
Are late payment penalties or penal charges subject to GST?
Yes, late payment penalties and other penal charges are considered taxable services, so GST is levied on them at 18%.
Can GST on Personal Loan charges be avoided or reduced?
GST on Personal Loan fees cannot be avoided legally, but borrowers can minimise GST impact by avoiding frequent statements, early closure, or additional administrative services.
Do self-employed borrowers need to submit GST certificates?
Yes, self-employed borrowers with business loans combined with Personal Loans must submit a copy of their GST certificate for documentation.
How does GST affect the overall cost of a Personal Loan?
GST adds to processing, documentation, and prepayment fees, slightly increasing the total loan cost, though EMIs remain unchanged.
Where can borrowers see GST details on their loan statements?
Borrowers can see GST details on the loan account statements, processing fee invoices, or prepayment/foreclosure receipts issued by the lender.
