Everything You Need to Know About GST on Loans

The amount of loan money that will be credited into your account when the Personal Loan is disbursed will always be a little less than the principal amount. This is because there are different charges associated with a Personal Loan. GST on personal use loans is one of those charges. 

This means you pay more than the base fee quoted by the lender. As it is deducted before the disbursement, you receive a lower amount in your hand. While GST doesn't affect the interest rate, it increases the upfront cost of borrowing. This blog covers everything you need to know about GST on personal use loans.

What is GST on Personal Loan?

GST (Goods and Services Tax) is charged at 18% on service-related fees associated with personal loans, not on the principal or interest. It applies to:

• Processing fees
• Prepayment charges
• Foreclosure fees
• Documentation charges
• Late payment penalties (with exceptions)

How GST on Personal Loan Affects You

Example:
For a ₹5 lakh Personal Loan with a 2% processing fee (₹10,000), GST adds ₹1,800 — total fee becomes ₹11,800. This reduces the disbursed amount and increases upfront costs.

Key Components of Personal Loan Affected by GST

Knowing the GST rates on personal loan-related charges, such as processing fees and foreclosure charges, can help debtors prepare ahead of time and prevent unexpected expenses.

Processing Fee

All personal loans are charged a processing fee, which is paid to the lender to incur the cost of assessing and approving the loan application. This fee is subject to GST at 18% raising the overall upfront cost to slightly more than the base fee quoted. Personal loan processing fees are usually between 2-3% of the loan amount.

The processing of a loan is a financial service offered by the lender, as it involves administrative and operational charges of disbursing and managing a loan payout. As a result, personal loan processing charges are subject to an 18% GST. 

Prepayment Charges

Prepayment charges, which are the fees charged when a borrower repays the Personal Loan before the tenure of the loan is over, are also subject to GST of 18%. This fee is either charged as a percentage of the amount outstanding on the loan or a fixed number of months' interest.

According to the GST regulations that have been in effect since July 1, 2017, these charges are treated as taxable supplies and are subject to GST at the current rate.

Foreclosure Charges

If you intend to foreclose your loan before the agreed-upon term, the lender will usually impose fees. As a result, an 18% GST rate applies to personal loan foreclosure expenses.

GST on Personal Loan: Exclusions and Exemptions

Penalty Charges

The 55th GST Council meeting, chaired by Finance Minister Nirmala Sitharaman, stated that no GST would be payable on fines imposed by banks or NBFCs for loan defaults.

Personal Loan EMI and Interest Paid

GST has no impact on personal loan EMIs and interest payments. This implies that the amount of money you pay per month to repay it remains unchanged, and the tax is only charged on service-related charges such as processing or prepayment fees.

Reserve Bank of India (RBI) mandates all lenders to disclose all fees and additional charges. Understanding how GST affects personal loans becomes important. Since you are already aware of these charges, you can consider the GST and plan your monthly budget and repayment effectively.

Impact on Loans and Borrowers: Before and After GST

The following table highlights the differences witnessed in the lending and financial sector before GST and after GST:

Also Read:  What is the GST Composition Scheme?

Advantages and Disadvantages of GST on Personal Loans

There are both benefits and disadvantages of GST on personal loans for borrowers. On the bright side, GST simplifies taxation as it removes the numerous indirect taxes. However, it adds the amount of GST component to the total processing fee, and it is applicable to charges such as prepayment penalty, raising the overall cost of the loan.

Pros of GST on Loans

• GST replaces all indirect taxes, which makes it easier to comply with the tax system.
• GST itemises the tax component of loan-related charges, increasing cost transparency.
• GST is levied solely on service charges (such as processing fees and loan prepayment charges), not on the loan amount itself.

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.
• The GST rate is the same on all types of loans, including personal, housing, and education loans, with no exceptions for priority needs.
• While GST isn’t charged on interest, higher upfront costs may affect your loan affordability.

Also Read:  Impact of GST on Business Loan Interest & Its Processing Fee

To Conclude

GST doesn’t impact your Personal Loan amount or EMI, but it does increase service-related costs. Knowing this helps you budget better and avoid surprises during disbursement or early repayment.

One way to reduce the impact of GST on personal loans is to apply for a personal loan with Poonawalla Fincorp with a low interest rate and processing charges. We offer immediate access to up to ₹50 lakh with minimal documentation. Contact us today for more details!

FAQs

Can I use the GST on Personal Loan as an input tax credit (ITC)?

Individuals who apply for personal loans for personal use are not eligible to collect ITC. However, if a GST-registered business takes out a loan for business purposes, the GST paid on qualified charges can be claimed as ITC.

How much does it cost to process a personal loan?

Most loans come with a processing fee between 2%-3% of the loan amount plus taxes.

Does GST make short-term personal loans more expensive than long-term ones?

Yes, in certain instances. GST is imposed as a percentage of certain one-time charges (such as processing fees). This is why the relative impact is greater for short-term loans, as the fee is spread across fewer EMIs.

Has GST changed the way lenders disclose loan charges?

Yes, under GST, lenders are required to explicitly show the base charge (such as the processing fee) and the GST amount separately on loan paperwork, making the cost breakdown more obvious for borrowers.

Does paying GST on personal loan imply I'll be charged twice?

No, GST is not an additional tax on interest or principal; rather, it replaces the previous service tax and applies solely to the loan's service component. You are not paying GST and service tax combined; GST has merely replaced the previous tax structure.