The Goods and Services Tax (GST) is the biggest reform in the tax regime of the country. It was introduced with an aim to simplify the tax structure in India and to ensure that there is one tax for the entire nation. There has been an impact of GST on different industries across the country. With regards to the Banking and Financial Sector, earlier a 15% service tax was charged. This has s been replaced with an 18% GST slab. Here is how the impact of GST for personal loan will affect you in the long run.
Impact of GST On Personal Loan – Before And After
|Before the implementation of GST||After the implementation of GST|
|Features||No change||No change|
|Interest rates||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.|
The Impact of GST on Personal Loan
With the implementation of GST, the Service Tax levied on a personal loan has increased to 18% from an earlier 15% rate. Having said that, this surely does not impact your EMI payouts but definitely affects the various charges that are levied. Some of these charges on include processing fees, prepayment charges, financial fitness report charges etc. Availing a personal loan will now cost you 3% more than what it used to before GST implementation. However there are indirect tax benefit on personal loan.
Increase in Prepayment Charges
Most banks tend to charge around 2% to 5% as loan prepayment charges. With the implementation of GST, the service tax on loan prepayment charges has increased by 3%. An example will help you understand it better. Jay has a loan of INR 5 lakh and the prepayment charges are between 2% to 5%, which comes to around INR 10,000 to INR 25,000. With the service rate of 15%, the tax on the same would be around INR 1,500 to INR 3,750. However, with the implementation of GST, the service tax will reach INR 1,800 to INR 4,500. This is an increase of INR 300 to INR 750. Some of the leading non-banking financial institutions like Finserv MARKETS have zero prepayment charges which can help you bring down your cost. Click here to explore.
Increase in processing fees
Whenever you apply for a personal loan, the financial institution will charge a processing fee of 1 to 2% on the loan in addition to the service tax. Before GST implementation, a 15% service tax was applicable on processing fee which, is now charged at 18%. This implies that there is a 3% increase in cost of availing a loan. Let us take an example here. Simran has applied for a personal loan of INR 10 lakh with a processing fee ranging between 1% to 2% of the loan amount or INR 10,000 – INR 20,000. The service tax levied would be range between INR 1,500 – INR 3,000. The same amount will now be INR 1,800 – INR 3,600 post implementation of GST.
Although the cost of acquiring a loan has increased, this burden is not applicable on your regular EMI payouts as they fall outside the purview of GST and Service Tax. This is primarily the reason why a personal loan still remains a preferred form of borrowing. Hence, when you apply for a personal loan, you have to consider the impact of GST on personal loans total loan amount.
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