Everything You Need to Know About GST on Loans

All goods and services sold in India are subject to taxation. Loans of all kinds, including Personal Loans, are no different. This is because loans are a service that borrowers avail of from banks and lending institutions.

If you meet Personal Loan eligibility requirements, then a Personal Loan can be a great way to access funds for an emergency or unplanned expenses or even pay for large expenses (up to 30 Lakh). If you’re considering availing of a Personal Loan, then you should be aware of the taxes these services attract.  In this article, we’ll cover everything you need to know about the taxes involved in borrowing money with a special focus on Personal Loans.  You can know everything about the impact of GST on Personal Loan in this article. 

What is GST? How Does GST on Personal Loan Work?

Good and Services tax, also known as GST, is the only kind of tax levied on services such as loans. Earlier, loans were subject to a Service Tax which has been replaced by the GST. GST aims to reduce the overall tax burden on consumers and ensure that there is one uniform tax levied instead of multiple layers of taxes that just added to the confusion.  

The GST is levied on almost every form of a loan. For example, if you avail yourself of an EMI through your credit card when you purchase a refrigerator, you will need to pay GST, which is built into your monthly instalments. If you avail of a Personal Loan, then you will need to pay GST on it as well.  

The GST is collected by the lender and then passed on to the government. The borrower does not have to undergo any other formalities apart from paying the GST to their lender. This is why GST is called an indirect tax, which is different from a direct tax such as income tax. GST on Personal Loans is also an indirect tax that is payable to the lender by the borrower. It is also crucial to understand the GST impact on Personal Loan EMI.   

Personal Loan: Before & After GST

 

	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: How Technology Is Helping To Get Personal Loan Digitally

Impact of GST on Personal Loans   

Earlier, a Service Tax of 15% was levied on loans such as Personal Loans. Now, the Service Tax has been replaced by the GST. Personal Loans are subject to a GST at the rate of 18%. Even though the Personal Loan GST rate seems like a sturdy increase in tax, given that the figure earlier was 15%, that is not the case. 
 
Borrowers need to know that the GST is not levied on interest payments or on the principal amount that they have borrowed. In other words, there is no GST on Personal Loan interest or principal. GST is only levied on the processing fees

charged by the lender in addition to any pre-payment charges levied by the lender. 

The processing fee is a fee that all lenders charge to consider your loan application and undertake the administrative work required to review your loan eligibility. This charge is usually limited to 1%-2% of your entire loan amount.  

For example, if you avail of a Personal Loan of Rs.1,00,000, then you will need to pay a processing fee of Rs.1,000 (depending on the lender). Further, GST will only be 18% of the processing fee, which means that you’ll need to pay a total tax of just Rs.180. Hence, you can avail of a loan of Rs.1 Lakh while paying only Rs.180 in taxes. This way, GST impact on Personal Loans is minimal. 

Advantages and Disadvantages of GST on Personal Loans  

Pros of GST on Personal Loans:

• The total amount of tax levied for borrowing activities is quite nominal and highly cost-effective. As demonstrated above when discussing GST on Personal Loans, you can avail of a loan of Rs. 1 Lakh by paying a tax of just Rs. 180.  
• You only need to pay GST once when you are borrowing money. This has greatly simplified the taxation process for borrowers 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 Personal 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 cost associated with borrowing money.  

How to Save GST Charged on Personal Loans?

The GST has impacted almost all products and services that are being sold in India. Since Personal Loans are also financial products, GST is levied on the same. However, the GST is not charged on the interest or principal of Personal Loans, rather it is charged on the processing fee or pre-payment charges.

The processing fee for Personal Loans is generally very nominal, which means it will not increase your borrowing cost. However, if you still wish to save GST on Personal Loans, you can opt for a lender who is charging the lowest processing fee. This way, you will only have to pay a nominal amount on your Personal Loan.

Meeting the Eligibility Criteria for Loans  

If you’re considering availing of a Personal Loan, then you need to be aware of the general Personal Loan eligibility criteria that need to be met:  

• Age – The age of the borrower 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 so that the borrower is mature enough to be able to service the loan and also has 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 by lending regulations.  
• Employment – The borrower needs to be an employee of an LLP, private or public company, or self-employed to be able to avail of a Personal Loan. This requirement exists to ensure that you have a regular source of income to repay the loan.  
• Monthly income – The borrower must have a monthly income of at least Rs. 20,000. This ensures that the borrower’s income is enough to service the Personal Loan.  
• Work Experience – The borrower must have a total work experience of at least 1 year. Further, the borrower must be in their current employment for at least 2 months. This ensures that the borrower has a stable source of income through which they can service the loan.  

Conclusion  

Essentially, whenever you take out a loan such as a Personal Loan, you will need to pay a GST of 18% on the processing fee and any pre-payment charges. This tax is levied by the lender and then passed on to the tax authorities. You do not need to complete any additional formalities to pay the tax amount.  

GST on Personal Loans is quite nominal and is negligible compared to the loan amount. If you meet the Personal Loan eligibility requirements, then you’re qualified to avail of a Personal Loan at any time. Remember that a Personal Loan can be availed for any purpose such as paying for a wedding, meeting educational expenses, or paying medical bills.