Personal loans have long been an extremely common way of financing large purchases. With a personal loan, you have immediate access to funds without putting up any collateral, and you can return the loan in monthly instalments. However, with GST (Goods and Service Tax) replacing the country's previous tax system, you may be wondering about the effect of GST on personal loan interest rates.
Read this detailed guide to get a better understanding on the implications of GST on personal loans.
Components of a Personal Loan Under GST
Personal loans under GST typically consist of the principal amount, interest charged by the lender, and any processing fees. While the principal amount is not subject to GST, interest and processing fees are taxable. GST is levied on these charges as per the applicable rate, currently set at 18%.
Pros and cons of GST on personal loan
Pros: GST streamlines tax compliance for lenders, making loan processing more efficient. It ensures uniformity in tax treatment across different types of loans. Additionally, GST can lead to reduced costs for lenders, which may translate to lower interest rates for borrowers.
Cons: GST adds to the financial burden for borrowers, as they have to bear the additional tax on interest and processing fees. This can make personal loans more expensive for consumers. Additionally, the complexities of GST regulations may result in confusion and administrative challenges for both lenders and borrowers.
Impact of GST on personal loans
GST is not applied to loan repayment or interest payments. Rather, it is imposed on the processing charges, pre-payment charges, and other personal loan charges paid to the bank or lender. The impact of GST on a personal loan is minimal because the principal and interest are the two main components of loan repayment.
With a reputed lender such as Bajaj Finance Limited, there are no hidden charges associated with your personal loan. All the information can be accessed in your loan documents and the website. It is important to read all the fees and charges associated with a personal loan before making your decision,
Here is a breakdown of how tax is levied on the various components of a personal loan under GST:
- Processing charges
When a lender approves a loan application, it incurs some administrative charges. Loan processing charges are the fees that you pay for sanctioning a loan. The processing charge is subject to GST because loan processing is a service provided by a financial institution. - Pre-payment charges
Although a personal loan has a set repayment tenure, most lenders will let customers repay the loan in part or in full early. In exchange, they impose a small penalty known as a prepayment fee. Loan prepayment is also a service offered by financial organisations, hence the charge includes GST.
GST is also levied on bounce charges, penal interest, and charges for outstation collection.
How to reduce the GST charged on personal loans?
Although GST has no significant impact on loan amounts, it may influence the prepayment penalties, late payment fees, and other expenses related with personal loans.
Here are two ways to lower your GST payment on personal loans:
- Select a bank or financial institution that offers loans with low processing fees or lower penalties for late EMI payments. It is critical to do a comparative analysis of the available possibilities and make an informed conclusion.
- Personal loans do not require collateral, so you can save on GST charges for legal document verification, security evaluation, mortgage creation, and so on.
Read all about the features of a personal loan offered by Bajaj Finance Limited.
Conclusion
The introduction of the GST caused considerable changes in the tax structure. However, it is important to note that GST for personal loans is only applied to specified components of your loan and has no effect on your loan amount.
If you choose your lender wisely, the additional charges imposed by GST will not seem costly.
Read all the fees and charges carefully and apply for a personal loan today.
