Understanding GST on Personal Loans
The Government of India introduced the Goods and Services Tax (GST) on 1 July 2017, creating a unified tax system for goods and services across the country. Personal loans also fall under its scope, as they are part of financial services.
It’s important to understand that GST is applied only on certain service components linked to a loan, not on the borrowed amount itself. To stay fully informed, always check the applicable charges with your lender before applying, in line with guidelines from the Reserve Bank of India (RBI) and other regulatory authorities.
By being aware of GST’s role in personal loans, you can plan better and make well-informed borrowing decisions.
How can I avoid paying GST on a personal loan?
It is essential to understand that GST on loan is not applicable, as they involve lending between individuals. GST is levied on goods and services, not on financial transactions like loans. Ensure you're dealing with genuine lenders, follow legal procedures, and consult a financial advisor for more guidance.
Components of personal loan before and after implementing GST
Components |
Before GST |
After GST |
Features, interest rates and EMIs |
Dependent on the lender you opt for |
No change |
Processing fees |
Service tax of 15% on processing fees |
GST of 18% on processing fees* |
Eligibility criteria |
Dependent on the lender you opt for |
No change |
Documentation required |
No GST certificate |
GST certificate required* (for self-employed availing business loan, a type of personal loan) |
* Check with your lender or review the loan’s terms and conditions, as features and EMIs may vary.
* Service-related charges only, not on the principal loan amount.
** Required only for self-employed borrowers applying for business-related personal loans.
Impact of GST on personal loan charges
The introduction of GST on personal loan services has changed how borrowers pay for additional charges linked to their loans. While the loan principal and EMIs remain unaffected, GST applies to service-related costs such as processing fees, prepayment charges, and foreclosure penalties. For example, if a bank charges Rs. 1,000 as processing fees, an additional 18% GST (Rs. 180) will be added, making the total Rs. 1,180. Understanding GST for personal loan helps borrowers plan expenses better and avoid surprises during repayment.
Pros and cons of GST on personal loans
Pros
- Lenders usually levy nominal processing fees, so even after applying personal loan GST, the extra cost remains minimal.
- With GST, borrowers now pay a single tax instead of multiple earlier taxes.
- GST is applied only once on the relevant services, making the process simpler.
Cons
- The implementation of personal loan GST increased the tax by around 3%, which slightly raises the overall cost of borrowing.
Personal loan components affected by GST
The following personal loan interest rate attracts tax when you borrow from Bajaj Finance Limited.
- Bounce charges
- Processing fees
- Foreclosure charges
- Penal interest
- Loan account statement charges
- Charges on outstation collection
- Part-prepayment charges
If you’re keen on making a part-prepayment, for instance, use the Bajaj Finserv Part Pre-Payment Calculator beforehand, as it includes the applicable GST.
To plan repayment, on the whole, use the Bajaj Finserv Personal Loan EMI Calculator before applying for a loan, and ensure that your repayment journey is smooth and hassle-free.
Frequently asked questions
Personal loan are exempt from GST as they are not considered a supply of goods or services under GST law.
GST is not applicable on loan EMIs as they are considered repayments of principal amount and interest, not subject to GST.
Interest on loans, including personal loans, is exempt from GST.
The GST rate on loan processing fees is 18%, as per regulations. Always check with your lender for the exact charges applicable to your loan.
GST is calculated at 18% on the processing fee amount. For example, a Rs. 1,000 processing fee attracts Rs. 180 as GST.
Yes, GST at 18% applies on foreclosure and prepayment charges, since these are considered service components under current government and RBI-aligned regulatory guidelines.
No, GST does not impact the loan’s interest rate or tenure. It is only applied to service-related charges linked to the loan.
Loans such as education loans and home loans may qualify for tax benefits under specific sections of the Income Tax Act, making them tax-free.
