All goods and services sold in India are subject to taxation. Loans
of all kinds, including Personal Loans,
are no different because loans are a service that borrowers avail of
from banks and lending institutions.
With the introduction of GST,
there has been a curiosity among borrowers about its impact on changes
associated with loans. In this blog, we will address these concerns,
providing clarity on the impact of GST on a Personal Loan as well as
on the overall lending landscape. Read on to know more!
What is GST?
The Goods and Services Tax, also known as GST, is a uniform taxation system in India that applies to all kinds of goods (like consumer durables) and services (like loans). It aims to reduce the overall tax burden on consumers with a single levied tax instead of multiple taxes.
How Does GST on Loans Work?
The GST is levied on almost every form of loan. For example, if you opt for an EMI option through your credit card when you purchase a refrigerator, you will need to pay GST, which is added to your monthly instalments. Similarly, if you avail yourself of a loan, you will be required to pay GST on it as well.
The GST is collected by the lender and then passed on to the government. As a borrower, you will not have to undergo any other formalities apart from paying the GST to your lender. This is why GST is called an indirect tax, which is different from a direct tax, such as income tax.
Impact on Loans and the Lending Sector: Before & After GST
The following table highlights the differences witnessed in the lending sector before GST and after GST.
| Parameters | Before GST | After GST |
| Features, Interest Rates, and Benefits |
Depending on the lender | No changes observed |
|
Equated Monthly Payments (EMIs) | Depending on the loan amount and tenure | No changes observed |
| Processing Fees | Service tax of 15% | Personal Loan GST rate for processing fee is 15% |
| Eligibility Criteria | Depending on the type of loan and lender | No changes observed |
| Documents Required | No GST certificate | GST certificate required for self-employed individuals who wish to avail of a Business Loan |
Also Read: What is the GST Composition Scheme?
Impact of GST on Loan Interest Rates
When deciding on a lender for a Personal Loan, the interest rate plays a crucial role. The impact of GST on loan interest rates is minimal. It does not influence the instalments on your loans.
In contrast to loan prepayment and processing, interest is not considered a service provided by lenders to borrowers. It is an amount paid at a fixed rate or floating rate as applicable on the loan. Hence, no GST is imposed on the EMI payment for a loan, offering respite from the effects of GST on interest on loans.
Advantages and Disadvantages of GST on Loans
The following highlights the pros and cons of GST on loans:
Pros of GST on Loans
- The total amount of tax levied for borrowing activities is quite nominal and highly cost-effective. For example, you can avail of a loan of ?1 Lakh by paying a tax of just ?180.
- You only need to pay GST once when you are borrowing money. This has greatly simplified the taxation process and has also reduced the tax burden.
- Now that the GST system has been implemented across India, you only need to pay one tax instead of having to pay multiple taxes. This single tax includes your tax payments to the central government as well as the state government.
Cons of GST on Loans
- The overall tax rate of loans has increased from 15% to 18%. Even though the difference is marginal, it will still increase the total borrowing cost.
How to Save GST Charged on Loans?
To save GST rates on loans, follow these tips:
- Check the Processing Fees: Choose a loan with lower processing and prepayment fees, as GST is charged on these components.
- Compare Interest Rates: Before applying for a loan, compare interest rates and processing fees across different financial institutions to find the most cost-effective option.
- Evaluate Different Options: Recognise that the increase in interest rates and processing fees due to GST may raise the overall borrowing cost of the loan. So, be careful of these changes when evaluating loan options.
Meeting the Eligibility Criteria for Loan
Before applying for a loan, you need to be aware of the basic eligibility criteria that must be met:
- Age
Your age should be at least 22 years at the time of borrowing and less than 58 years at the time of loan maturity. These requirements have been put in place to ensure you are capable of repaying the loan on time and have a regular source of income until the loan repayment period is complete.
- Citizenship
If you’re borrowing from an Indian lender, then you need to be an Indian citizen as per lending regulations.
- Employment
You must have full-time employment. This requirement exists to ensure that you have a regular source of income to repay the loan.
- Monthly income
You must have a monthly income of at least Rs. 30,000. This ensures that you can afford to pay the loan EMIs without financial difficulty.
- Work Experience
You must have a total work experience of at least 1 year and be in current employment for at least 1 month.
Documents Required to Apply for a Loan
The following is a list of documents you need to submit when applying for a loan:
KYC Documents:
PAN card, Aadhaar card, driving licence, Voter ID card, etc.
Address Proof:
Passport, utility bills, rent agreement, etc.
In addition to the above, you need to submit the following documents:
Salaried Individuals
- Salary proof for the last three months.
- Bank account statements for the last three months.
Self-employed Individuals
- Income Tax Returns from the last three years.
- Bank account statements for the last three months.
How to Apply for a Personal Loan Online?
Here are the steps you need to follow to apply for a Personal Loan online:
Step 1: Click the ‘Apply Now’ button to fill out the application form.
Step 2: Provide your date of birth, PAN card details, monthly income, and residential information.
Step 3: Upload the necessary documents and click on the ‘Submit’ button.
Also Read: Impact of GST on Business Loan Interest & Its Processing Fee
To Conclude
The impact of GST on a Personal Loan and other loans can be witnessed in terms of higher processing fees and an increase in the overall cost of borrowing. Hence, you must compare different lenders and their interest rates to select a loan that best meets your specific financial needs.
Frequently Asked Questions
- Is a GST certificate necessary when applying for a Personal Loan?
Only self-employed individuals seeking a Personal Loan for business purposes must submit a GST certificate.
- Does GST directly affect the EMI amount?
No, GST has no direct impact on the EMI amount. While the overall cost of your loan may increase, it is essential to note that any changes are not reflected in the EMI payments.
- How much does it cost to process a loan?
Most loans come with a processing fee of up to 2% of the loan amount plus taxes.