GST (Goods and Services Tax) applies to various financial services, whether a personal loan or any product or service. But if we talk specifically about personal loans, then GST is not charged on the loan amount or interest. It is charged on certain fees like processing fees and penalties.
You must be aware of all the charges you need to pay while availing a personal loan. It would not only help you have a better understanding of personal loans but also allow you to plan your finances better.
So, with this brief guide, let’s understand the significance of GST on loans and how it impacts the overall loan cost.
Overview of GST
GST stands for Goods and Services Tax and is a tax on the supply of goods and services in India. It was introduced in 2017, replacing multiple indirect taxes like VAT, service tax, and excise duty. As of today, GST is divided into four subcategories:
- CGST (Central GST): Collected by the central government.
- SGST (State GST): Collected by state governments.
- IGST (Integrated GST): For interstate transactions.
- UTGST (Union Territory GST): Collected by the union territories of India
Quick Recap: What is a Personal Loan?
A personal loan is an unsecured loan provided by banks and financial institutions like CASHe. It could be for anything including education, medical emergencies, travel or home renovation. As it is an unsecured loan, no collateral is required. So, you do not need to pledge any property or asset to avail the loan.
Personal loans have fixed or variable interest rates and flexible repayment tenures. Banks and financial institutions also charge processing fees, late payment charges and prepayment penalties on personal loans.
GST on Personal Loan Charges
As mentioned earlier, GST is not applied to the principal loan amount or interest. It may be applicable only to specific fees like:
- Processing Fees- a one-time fee (usually 2% – 3% of the loan amount) you pay when you take a loan.
- Prepayment Charges- the fee you pay if you repay the loan before the tenure ends.
- Late Payment Fees- the fee you pay if you miss your EMI.
- Loan Cancellation Charges- the fee paid on the cancellation of the loan after approval.
The current GST rate as of February 2025 is 18% for personal loan fees and charges.
Components Exempt From GST
Like there are fees that attract GST in personal loans, there are some components of a personal loan that are not taxed under GST. These components include:
- Loan Principal: The actual amount borrowed from the bank or financial institution.
- Interest on Loan: No GST on personal loan interest.
- EMI Payments: As EMI consists of interest and principal, no GST on personal loan EMI applies.
- Stamp Duty: This is a state tax and is not covered under GST.
Make sure you are aware of these components so you can calculate the actual cost of your loan.
Impact of GST Rate Changes Over Time
In 2017, the GST rate on personal loan charges was set at 18%. And it has remained unchanged till February 2025. But, if the government increases GST, fees like processing and prepayment charges would also increase. However, if the rate decreases, then the borrowing costs may reduce slightly. So, make sure you check GST rates before taking a loan. As GST is not applied to interest and loan amounts, a rate change would not affect EMIs.
Practical Example: How GST Affects Loan Costs
Here’s a practical example for a better understanding:
Suppose you take out a loan amount of ₹5,00,000 at an interest rate of 12% per annum for a tenure of 36 months. The processing fee and prepayment fee charged by the bank are 2% and 3% respectively, and the late payment fee is ₹1000. GST applied here is 18%.
Processing Fee Calculation:
- Processing Fee = 2% of ₹5,00,000 = ₹10,000
- GST on Processing Fee = ₹10,000 × 18% = ₹1,800
- Total Processing Fee = ₹11,800
Prepayment Charges:
- Prepayment Fee = 3% of ₹5,00,000 = ₹15,000
- GST on Prepayment Fee = ₹15,000 × 18% = ₹2,700
- Total Prepayment Charges = ₹17,700
Late Payment Fee:
- Late Payment Fee = ₹1,000
- GST on Late Payment = ₹1,000 × 18% = ₹180
- Total Late Payment Fee = ₹1,180
Conclusion
These are the fundamentals of GST on loans. Though GST is fixed at 18% on fees like processing fees and prepayment charges, you can still save costs on your loan if you choose your lender wisely.
Download the CASHe app to get instant personal loans at competitive interest rates and nominal processing fees. Apply today and get your loan approved within minutes.
