The Goods and Services Tax (GST) is the country’s greatest tax reform. It was created with the goal of simplifying India’s tax structure and ensuring that there is just one tax for the whole country. GST has had an influence on several industries across the country. Previously, a 15% service tax was levied on the banking and financial sector. This has been replaced with a GST rate of 18%. Here’s how the impact of the GST on personal loans will affect you over time.
What is GST?
The Goods and Services Tax (GST) – India’s comprehensive tax reform – was adopted by the Indian government to simplify the country’s tax structure by adopting a single tax system. Most businesses, including banking and financial services, are subject to GST. The GST rate for the Banking and Financial industry was 15% when it was first implemented, however it was later raised to the present 18% GST slab. GST has an influence on personal loans since it is a service fee.
GST on Personal Loan
With the implementation of GST, all services provided by banks and financial institutions would be subject to an 18 percent service tax. Every borrower who takes out a personal loan must pay GST at the current rate of 18%. This GST charge is in addition to the lender’s regular personal loan fees.
If you’re thinking about taking out a personal loan, you might be curious about the GST on personal loans. Is there a high rate of GST on personal loans? Is there a noticeable difference? The good news is that, while personal loan charges have increased somewhat, it will not have a big impact on your EMIs. Continue reading to learn more.
GST on Processing Fees, Documents & EMI
Lenders charge a processing fee for a loan granted to borrowers. This fee relates to the charge for the processing of a loan application, including a personal loan application. Normally, a processing fee is charged between 2% – 3% of the loan amount. GST at 18% is chargeable on the personal loan processing fees to be paid by a borrower.
GST is also applicable to the loan account statement charges. Likewise, it is also applicable to the foreclosure charges, i.e., prepayment charges for closing personal loans before maturity,
However, GST does not impact your monthly loan repayments like EMIs. GST does not directly impact personal loan EMIs as personal loan EMI did not attract service tax before GST implementation, as such, it does not attract GST now. So, a borrower’s personal loan EMI remains unchanged with GST’s impact on the personal loan.
A borrower who is self-employed and has a business loan as a part of the personal loan has to submit a copy of the GST certificate for documentation purposes.
Thus, it can be seen that GST levied on a personal loan impacts different aspects of a personal loan differently and may not impact all elements of a personal loan.
In the GST era, how much of an impact will there be on Loans?
To increase their credit growth, banks and other financial organisations provide a variety of loans. Personal loans, house loans, vehicle loans, business loans, and other types of loans are some of the most common. The imposition of service tax, which used to be 15%, was widespread among the loans. However, after GST is implemented, the 15% service tax will be replaced with a regular 18% rate, making it a pricey affair. Because various loans may have distinct pricing structures, it’s best to look at each one independently.
Why is GST Required for Loan Pre-closure?
We occasionally get sufficient cash to pay out the outstanding loan debt in full without having to wait for the loan to conclude as anticipated at the time of sanction. In loan jargon, this is known as preclosure. Individuals are spared from paying more interest to lenders as a result of this. From the lender’s standpoint, it’s a missed opportunity to earn interest. As a result, GST is included in the overall prepayment charges.
The Effects of the GST Rate on Personal Loans
Everyone’s biggest concern is if the higher GST rate would raise the interest rate on their personal loan. Customers should be aware that the GST applies to services provided by the banking and financial sectors. Interest on a personal loan, on the other hand, is paid at a fixed rate for the purpose of using the money borrowed and is not a service provided by the banking and financial sectors.
As a result, there is no GST on the interest charged on personal loans. However, there are several aspects of a personal loan that are affected by GST.
Service tax is one of the fees associated with a personal loan. Service tax is typically applied on processing fees and prepayment expenses. However, the GST rate will now be the regular rate. Across banks in India, the processing cost used to be 1% to 2% of the loan amount, plus service tax. So, if the loan is for ₹9 lakhs, the processing charge might range from ₹9,000 to ₹20,000. The service tax was estimated to cost between 1,350 and 2,700 dollars. When all of this is taken into account, the processing charge ranges from ₹10,350 to ₹20,700, not including GST. The processing charge, however, will increase to ₹10,620-21,240 after GST is implemented.
Prepayment fees will also alter. Prepayments are subject to a fee of 2% to 5% of the outstanding loan + service tax prior to the implementation of GST. The prepayment price would be 4,000-10,000+15 percent service tax if the outstanding loan was 2 lakhs. A total of ₹4,600-11,500 will be raised. However, if the GST is implemented, the same sum will rise to between ₹4,720 and ₹11,800. The tax increase has little effect on the economy. So don’t be concerned; you may apply for a personal loan online at GST rates.
What Parts of a Personal Loan Are Affected by GST?
The components of GST on personal loans are as follows:
- Fee for Processing the Bank/Financial Institution provides the Service of Loan Processing
As a result, GST is collected based on the processing cost. The amount of GST charged will be determined by the actual processing fee. For example, suppose you take out a personal loan for Rs 50,000 and the processing cost is 4% of the loan amount. The processing price would be Rs 2,000, with 18 percent GST applied to the first Rs 2.000, bringing the total to Rs 2,360.
- Fees for Pre-Payment or Pre-Closure
In addition to the service tax, when you apply for a personal loan, the financial institution will charge you a processing fee of 1 to 2% of the loan amount. Prior to the establishment of the GST, processing fees were subject to a 15% service tax, which has now been increased to 18%. This means that the cost of obtaining a loan has increased by 3%. Let’s look at an example. Simran has filed for a personal loan of INR 10 lakh with a processing charge that ranges from 1% to 2% of the loan amount, or INR 10,000 to INR 20,000. The service tax would be imposed in the range of INR 1,500 to INR 3,000. Following the imposition of GST, the same cost will now be INR 1,800 – INR 3,600.
When you prepay or pre-close a loan, the bank or financial institution assists you in closing the transaction. As a result, GST will be applied on prepayment fees/penalties on a loan. For example, if the bank imposes a 3% prepayment cost on a personal loan of Rs 50,000, the prepayment price would be Rs 1500, and with 18 percent GST, the total would be Rs 1,770. As you can see, the sum isn’t excessive, but if you’re still worried, there are methods to reduce the amount you pay in GST on a personal loan.
Despite the fact that the cost of obtaining a loan has increased, this burden does not apply to your regular EMI payments because they are exempt from GST and Service Tax. This is one of the key reasons why a personal loan is still the most popular type of credit. As a result, you must factor in the impact of GST on the overall loan amount when applying for a personal loan.
Impact of GST on Personal Loan – Before And After
|Before the implementation of GST
|After the implementation of GST
|Taxes were not affected
|Taxes were not affected
|Processing Fees on Personal Loan
|Processing fee on personal loan attract a service tax of 15%.
|Processing fees on personal loans attract a GST of 18%.
|Eligibility Criteria and Documents
|To avail a personal loan borrowers need to meet personal eligibility criteria and submit documents required by the lender.
|The personal loan eligibility criteria remains the same after the GST implementation. However, a self-employed borrower availing business loan, a type of personal loan, needs to provide a copy of GST certificate as a document.
How to Save Money on Personal Loans Due to GST?
The processing and prepayment fees determine how much GST is paid on a personal loan. As a result, the easiest method to save money on GST is to take up a loan with a reduced processing fee or prepayment penalty. It would be good to compare different lending options.
However, it is also important to pay attention to the loan’s interest rate and, in general, strike a balance between all of the fees and charges imposed on a personal loan.
The Advantages and Disadvantages of Taking Multiple Personal Loans
There is no limit to the number of personal loans one may obtain if one follows the rules. Individuals usually only take out one personal loan since handling many loans is difficult. However, there have been cases where borrowers have taken out multiple loans to cover their financial obligations. Let’s take a look at the benefits and drawbacks of having several personal loans.
Advantages of Multiple Personal Loans
1. Improves your credit Score
Multiple loans, if properly handled and repaid on time, can help you create a better credit score. This is a great opportunity to improve your credit score quickly by using a personal loan app to manage your debt.
2. Quick Approval
When an unforeseen event occurs that need immediate funding, a variety of personal loans can provide you with the funds you need to deal with the crisis, with rapid loan approvals available online.
3. Quick Response
There are times when an unexpected occurrence occurs, and you have very little time or money to respond. Multiple lines of credit might help you meet your financial obligations in order to avoid or quickly resolve the problem.
4. Financing Options
Borrowers who have several lines of credit have access to multiple financing sources, which might make it easier to satisfy their financial obligations.
5. Financial Well-being
If you own a business that requires ongoing funding, several personal loans are a fantastic way to maintain and safeguard your company’s finances.
Disadvantages of Multiple Personal Loans
1. Loan Rejection
Having multiple loans may not be an issue, but it could raise your debt-to-income ratio and lead to the rejection of loan applications.
2. Effect on your Credit Score
If you don’t pay your bills on time, your credit score will suffer.
3. Pay a Higher Price in the end
Your expenditures rise as a result of many personal loans, and you’re obliged to pay multiple EMIs at a high interest rate.
4. Impact on one’s Level of Living
With rising costs, you’ll have to cut back on a variety of required and luxurious items, lowering your level of living.