Introduction
What's the impact of GST on personal loan? Well, opting for a personal loan is easy when you apply through lendingplate. You can borrow online without offering any collateral. Apply for loans from ₹10,000 to ₹2,50,000 and get the money in your account within 30 minutes. However, before taking a loan, know all the charges involved.
Most people only check interest, but other fees matter too. These include processing charges, prepayment penalties and GST. Each of these can affect your loan's total cost in unexpected ways. This blog explains the impact of GST on personalloan, how it works and what you should watch out for.
What is GST?
GST stands for Goods and Services Tax. It is a single indirect tax applied across India on goods and services you use daily. Before GST, there were many taxes like service tax, VAT and excise duty. Now, GST replaces them all with one uniform tax.
The tax is collected at every stage, from production to consumption, and paid by the end consumer. GST in personal loans applies only to specific services, not the loan amount. Knowing the impact of GST on personal loan helps you know how charges are added & why your final cost may increase.
Factors Affecting GST on Personal Loans
When applying for a loan, GST does not apply to the borrowed amount. It only affects service fees charged by lenders. The impact of GST on personal loan depends on factors like charges added, loan type, and changes in tax policy. These influence how much GST you will end up paying on your loan.
1. Type of Fee Charged - GST is mainly added to fees like processing, foreclosure, or prepayment. These are service-based, so tax applies only to them.
2. Nature of the Loan -Loan purpose doesn't affect GST rate. All personal loans—whether for weddings, gadgets or bills—have the same GST structure.
3. Loan Amount & Fee Percentages -Higher loan amounts often carry higher processing fees. Since GST is a percentage of that fee, the tax amount increases.
4. Policy or Tax Rule Changes - If tax rules or rates change, GST will also change. Any update in regulations affects what you pay as GST on services.
How GST Affects Different Components of a Personal Loan?
GST on Processing Fees
Lenders spend money to check your documents and approve your loan. This cost is covered by a one-time processing fee. GST at 18% is added to this fee. The impact of GST on personal loan becomes visible here, as it increases the total charge you pay upfront.
GST on Prepayment Charges
If you repay the loan early, the lender may charge a penalty. This penalty also counts as a service. So, 18% GST is charged on the penalty amount if you decide to close the loan before the end of the term.
Personal Loans After and Before GST
The impact of GST on personal loan became noticeable after July 2017, when the tax structure changed for financial services across India. Here's a comparison of key elements before and after GST:
Parameters | Before GST | After GST |
The loan's processing fees | 15% service tax added on top of processing fees charged by the lender. | 18% GST is charged on the processing fee taken by NBFCs or banks. |
Foreclosure charges | 15% service tax applied to any penalty paid for closing the loan early. | 18% GST added to foreclosure penalties if the loan is closed before tenure. |
Documents Required | Lenders asked for ID proof, address proof and income proof only. | Same documents required; GST certificate only needed for business loans. |
Pros of GST on Personal Loans
1. Simple Procedure -GST makes loan charges easier to understand. You know exactly where tax applies during processing, prepayment or other related services.
2. Potential Cost Benefits - With fixed GST, you avoid unexpected service taxes. Choosing low processing fee loans can reduce your total cost effectively.
3. Uniform Taxation - All lenders apply the same GST rate, so rules stay consistent. You don't pay extra based on where you borrow.
Cons of GST on Personal Loans
1. Lack of Knowledge in the Early Phase -When GST was introduced, many borrowers found it hard to understand how it changed loan service charges and structures.
2. Higher Charges on Services -GST increased the cost of services such as processing & prepayment. It adds to the overall loan repayment burden.
3. Indirect Impact on Loan Cost -While GST doesn't touch interest rates directly, higher fees can raise the total loan cost over your repayment period.
How to Calculate GST on Personal Loan?
The impact of GST on personal loan applies only to services like processing or penalty charges, not the loan amount. To find the GST, use this method:
GST Amount = Fee Amount × GST Rate ÷ 100
For example, if the processing fee on a ₹1,00,000 loan is 2%, that's ₹2,000. Multiply ₹2,000 × 18 ÷ 100 = ₹360.
So ₹360 is the GST added to your processing fee.
This amount is either included in your loan or taken upfront during disbursal, depending on the lender's process.
How to Reduce GST Charges on Personal Loans?
Even though GST doesn't apply to the loan amount, it can increase costs on services linked to your personal loan. Here are the ways:
1. Choose lenders that offer low processing fees. Lower fees reduce GST since it applies as a percentage of that cost.
2. Select digital-first lenders. Digital processing can skip some manual charges that usually come with added GST.
3. Always check the fee breakdown before applying. Comparing fee structures helps you spot GST-heavy loan offers easily.
How Availing a Lendingplate Personal Loan Helps Reduce GST?
One of the trusted digital lending platforms in India, lendingplate offers loans with simple processes and fewer charges. This can help lower the GST you pay on your loan.
1. The processing fees on lendingplate start at just 1% of the loan amount. A lower fee means a smaller GST charge.
2. lendingplate offers instant personal loans with transparent costs, so there are no surprise charges that could increase your GST.
3. Since lendingplate allows online applications with minimal documents, you avoid added service costs that usually attract GST.
GST rules came into effect on 1 July 2017. Since then, services across India are taxed at a flat 18% rate unless exempted.
Check out lendingplate’s Personal Loan Processing Fees
Conclusion
The impact of GST on personal loan charges may seem small, but can add up quickly if not understood properly. It applies mainly to processing fees and other service charges. Choosing a loan provider like lendingplate with low fees, no hidden costs, and easy terms can help reduce your GST burden. Since everything is digital and upfront, you avoid paying extra on unnecessary services. Check the fee structure before applying. With the right choice, you get the money you need without overpaying.
Frequently Asked Questions (FAQs)
Q.1. Does GST affect the EMI amount on a personal loan?
GST does not change the EMI directly because GST is not charged on the loan's principal or interest. EMIs depend on your loan amount, interest rate, tenure, etc. GST applies to processing fees & service charges. It increases the total cost of the loan. So your EMI remains the same, but costs increase.
Q.2. Can GST rates on financial services change in the future?
GST rates are decided by the GST Council & may change anytime. You might pay more for loan processing or other related services if the rate increases. A lower rate may also reduce the overall expenses. Borrowers must check the current rate before applying for the loan to avoid surprises.
Q.3. Are there any other taxes or fees related to personal loans besides GST?
Borrowers may need to pay processing fees, foreclosure charges, late payment penalties, mandate return fees, etc. The charges vary by lender.
Q.4. Is GST applicable to other financial products and services?
GST is charged on different financial services such as credit card annual fees, insurance premiums, account-related charges, loan processing fees, etc. The standard GST rate is 18% on most services. So GST may apply unless it falls under a specific exemption by the government whenever a financial service is offered.
Q.5. Are there tax implications on the interest paid for personal loans?
Interest on personal loans does not offer tax benefits. But in some cases, like using the loan for home renovation or business expansion, deductions might apply under specific tax sections. You should have valid proof and a definite purpose of the loan to claim benefits.
