Gold has always been regarded as a safe-haven in times of financial distress. Obtaining credit by pledging gold belongings has a long-standing history in India. In current times, gold loans are offered at competitive borrowing costs, as a secured form of credit. However, the implications of the Goods and Services Tax (GST) are often an overlooked factor that impacts the overall cost of borrowing.
While GST does not affect the interest component of a Gold Loan, it does impact other components of gold loan interest and charges. Read this blog to understand how GST affects the overall cost of borrowing of a Gold Loan in India by impacting its various components.
Impact of GST on Gold Loan Interest
The interest component of a Gold Loan generally constitutes the majority of the overall cost of borrowing. However, the interest component is exempt from GST, and you have to pay only the interest charges of a loan without any additional taxes.
To understand this better, consider the example of a Gold Loan of ₹10,00,000 offered at an interest rate of 12% per annum. This means that the lender charges 12% of the loan amount as the rate of interest, amounting to ₹1,20,000 over a year. Since the interest component of gold loans is exempt from GST, you will only have to pay ₹1,20,000 without having to pay any additional taxes.
Impact of GST on Gold Loan Charges
It is worthwhile to understand that apart from the interest component, there are also other charges that come into play when determining the overall cost of borrowing of a Gold Loan in India. The following are some of these charges that are subject to GST, which can increase the effective cost of the loan.
1. Processing Fee
Lenders levy a nominal fee as a one-time charge for loan handling and processing. The processing fee is not exempt from GST and an 18% additional GST is added to this component. For example, if your processing fee is ₹1000 for a loan, the total amount payable becomes ₹1180 after GST.
2. Documentation Charges
This component is associated with the cost of preparation and verification of loan documents. Like processing fees, the loan documentation charges are also not exempt from GST and an 18% GST is similarly levied on these charges.
3. Foreclosure Charges
Depending on whether your lender allows foreclosure or prepayment of your Gold Loan without any additional charges, GST can be levied on such a component. While some lenders may offer a zero foreclosure/prepayment policy, others charge you a nominal fee for the same. In such cases, you will have to pay an 18% GST on the applicable foreclosure/prepayment charges.
4. Valuation Charges
Gold Loans often involve valuation of the gold being pledged to assess their authenticity and establish their market value. This incurs some additional valuation charges. The valuation fee, in addition to 18% GST, is usually borne by the borrower.
How GST Influences Your Gold Loan Experience
Although the interest component of gold loans is exempt from the Goods and Services Tax, it affects other components thereby having larger implications on your overall loan experience. Here is how:
1. Total cost of borrowing
Since GST is levied on components like the processing fee, documentation charges, valuation fees and foreclosure/prepayment charges, it can lead to a higher cost of borrowing. Although these charges in isolation may be perceived as nominal, for high-ticket loan borrowers, the cumulative costs can add up to a significant amount thereby increasing the overall cost of taking the loan.
2. Repayment planning
Considering the impact of GST on your monthly repayments is an important implication if you are already looking out for a Gold Loan. It is important to understand all such components that attract GST and how they may impact the actual loan amount disbursed after deduction of all charges. In turn, this will help you with better budgeting and repayment planning without affecting your existing monthly financial obligations.
3. Comparing loan offers
Comparing various lenders to check the differences in loan offers is important to diminish the overall financial burden of GST. For example, you should always check for foreclosure/prepayment charges. Lenders that allow zero foreclosure/prepayment can help you manage repayments effectively and get the best loan experience.
To Conclude
For ages, gold has held significant traditional and financial value in India. A Gold Loan is offered by lenders against gold belongings kept as a collateral. However, even with the benefits of a secured loan, the Goods and Services Tax (GST) in India adds up to the overall cost of borrowing of a loan against gold. While the interest component of a Gold Loan is exempt from GST, other components like processing, documentation and valuation charges attract an 18% GST. This is why before opting for a Gold Loan, you should consider the overall cost, budget your monthly repayments and compare loan offers from different lenders.
Poonawalla Fincorp offers hassle-free gold loans up to ₹50 Lakhs starting at a competitive interest rate of just 11%* p.a. You can get up to 75% loan-to-value against your gold belongings with minimal paperwork and zero hidden charges from a well distributed network of branches across India. Visit your nearest branch to avail one today!
Frequently Asked Questions
1. Do I have to pay GST on Gold Loan interest?
No. The interest component of a Gold Loan is exempt from the Goods and Services Tax (GST). You only have to pay the interest amount.
2. Is GST levied on Gold Loan processing charges?
Yes. An 18% GST is levied on Gold Loan processing charges which is borne by the borrower. In addition to this, associated charges like valuation fees, documentation charges and foreclosure/prepayment charges also attract GST.
3. How much GST is levied on Gold Loan interest and charges?
Although the interest component of a Gold Loan is exempt from GST, you have to pay an 18% GST on other charges including processing fees, valuation fees, documentation charges and foreclosure/prepayment charges.
4. Where can I get a Gold Loan affordably without any hidden charges?
You can easily get an affordable Gold Loan without any hidden charges from Poonawalla Fincorp.
5. How do I apply for a Gold Loan with Poonawalla Fincorp?
If you’re looking for a hassle-free loan against gold, visit your nearest Poonawalla Fincorp branch and our representatives will assist you with your application.
About the Author
We take utmost care to provide information based on internal data and reliable sources. However, this article and associated web pages provide generic information for reference purposes only. Readers must make an informed decision by reviewing the products offered and the terms and conditions. Loan disbursal is at the sole discretion of Poonawalla Fincorp.
*Terms and Conditions apply