Understanding how the Goods and Services Tax (GST) affects Personal Loans can be a bit tricky. Whether you are thinking of getting a loan or paying one off, knowing about GST is important for your financial plans. Get a hold of how GST has an impact on Personal Loans so you can choose wisely.
Personal Loans in India experienced a significant shift after implementing the GST on July 1, 2017.
Before this change, Personal Loans were subject to a service tax of 15%. However, the advent of GST saw this tax rate increase by 3%, bringing the total to 18%. This increment means that borrowers now have to account for a higher GST component when they opt for Personal Loans.
Despite the rise in the overall cost due to the increased GST rate, Personal Loans continue to remain an attractive financial tool. They offer the advantage of accessing additional funds without the need to pledge any collateral. Even with the added GST, Personal Loans still serve as a viable option for those seeking financial flexibility.
When it comes to understanding the impact of GST on Personal Loans, several key factors play a crucial role. These elements not only determine the extent of the tax's influence but also shape the overall financial implications for the borrower. Here's a closer look at these determining factors:
Processing fees:GST rate on Personal Loans is primarily levied on the processing fees. Since these fees vary from lender to lender, the GST payable can differ depending on the chosen financial institution and its fee structure.
Loan amount and tenure: Although the GST is not directly charged on the loan amount or its tenure, these factors can indirectly influence the processing fees. Typically, higher loan amounts or longer tenures might attract higher processing fees, thereby increasing the GST component.
Regulatory changes: Any changes in the GST rates or regulations by the government will directly affect the amount of GST charged on Personal Loan-related services.
Additional charges: Other loan-related charges like prepayment fees, late payment penalties, and cheque bounce charges also attract GST. The structure and frequency of these charges can influence the total GST cost on a Personal Loan.
There is no legal way to avoid GST on Personal Loans; however, you can minimise its impact. Opting for lenders with lower processing fees or negotiating the fees can reduce the GST burden on you before you apply for the loan.
Not all charges related to Personal Loans attract GST. Key components attracting GST include:
Every time you apply for a Personal Loan,, the financial institution incurs administrative expenses, which are passed on to you as processing charges. As this processing constitutes a service provided by the institution, it attracts a GST of 18%.
For example, if you take a Personal Loan of ₹2,00,000 and the processing fee is 3%, the pre-tax processing fee comes to ₹6,000. With the addition of 18% GST, the total processing fee you pay amounts to ₹7,080.
Personal Loans often come with the flexibility of prepayment, but this comes at a cost known as the prepayment charge. Since this is a service offered by lenders, it too is subject to GST.
Let's say your lender imposes a 2% prepayment fee on a Personal Loan amount of ₹50,000. The prepayment fee would be ₹1,000, and with an 18% GST, the total payable amount would be ₹1,180.
The deciding factor for many borrowers when choosing a lender is the interest rate. It's important to note that GST does not apply to the interest paid on Personal Loans. Interest payments are a part of the financial agreement between the borrower and lender and are not considered a service.
Understanding the implications of GST on Personal Loans is crucial for any financially savvy individual. While the inclusion of GST on processing fees slightly elevates the initial cost, Axis Bank offsets this with its array of borrower-friendly features.
Offering competitive interest rates, Axis Bank ensures that Personal Loans remain affordable. The bank simplifies the borrowing process with minimal documentation and quick disbursal of funds. The transparency in fee structure, including clear information about the GST component, allows for better financial planning.
Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision