Understanding the concept of GST on personal loans

Confused about extra taxes on your loan? With Bajaj Finserv, you can check your pre-approved loan offer in just 2 steps and get full clarity on GST and all fees upfront. Transparent terms mean no hidden surprises – you can plan your budget confidently.

Components of a Personal Loan Under GST

Under GST regulations, a personal loan consists of three main components:

• Principal Amount: This is the money you borrow, which you must repay. Principal does not attract GST, so you only repay the exact amount you took.
• Interest Charges: The cost of borrowing, expressed as an annual percentage rate. Interest is also exempt from GST, which means your EMI calculations remain straightforward.
• Service Fees & Charges: This covers processing fees, pre-payment penalties, bounce charges, and maintenance fees. All these services attract GST at 18%, adding a small extra cost on top of the base fees.
   

Why it matters: By knowing exactly which parts of your loan attract GST, you can plan your EMIs and total repayment more accurately. It also helps you choose the right lender based on overall cost, not just interest rates.

Pros and Cons of GST on Personal Loans

The introduction of GST simplified the tax structure but added new costs. Here’s a balanced view:

• Pros:
  • Uniform tax rate of 18% on all financial service fees, making charges predictable.
  • Simplified compliance for lenders, which can lead to faster processing and lower operational costs passed on to borrowers.
  • Greater transparency in loan agreements, helping borrowers compare lenders easily.
• Cons:
  • Additional cost for borrowers because service fees now include GST.
  • Complexity for consumers in calculating total loan cost, especially when multiple fees apply.
  • Potential for confusion if lenders don’t clearly list GST-inclusive or exclusive fees.

GST affects only the service fee components, not your EMI’s principal or interest portions. Since principal and interest form most of your EMI, the overall impact of GST on your monthly payment is minimal. For example, if your processing fee is ₹1,000, GST adds just ₹180 to your total cost – a small amount spread over your loan tenure.

For a loan of ₹5 lakh with ₹7,000 total service fees, GST would add ₹1,260. When spread over a 60-month tenure, that’s just an extra ₹21 per month. Compare this small incremental cost against the benefits of quick approval, flexible terms, and no collateral.

How GST Is Levied on Loan Components

GST applies to various loan-related services at the current rate of 18%. Here’s how it breaks down:

• Processing Fee: One-time administrative fee for loan approval, now plus 18% GST.
• Pre-payment Penalty: Charged when you pay off part or all of your loan early; GST applies on this service fee.
• Bounce Charges: Fees for failed EMI transactions; GST is added to each bounce penalty.
• Maintenance Charges: Annual or periodic fee for maintaining a revolving credit facility; taxed at 18%.
   

Why it matters: Understanding these specifics helps you anticipate extra costs and avoid surprises, especially if you plan to prepay or use a Flexi loan facility.

Although GST has no significant impact on your main loan amount, it may influence the prepayment penalties, late payment fees, and other expenses related with personal loans. Here are practical ways to lower your GST payment on personal loans:

• Select a bank or financial institution that offers loans with low processing fee personal loan or lower penalties for late EMI payments. It is critical to do a comparative analysis of the available possibilities and make an informed conclusion. Look for festive offers, loyalty discounts, or fee waivers for high CIBIL score applicants.
• Personal loans do not require collateral, so you can save on GST charges for legal document verification, security evaluation, mortgage creation, and property-related services that secured loans typically require.

Additional strategies include:

• Pay EMIs on time to avoid bounce charges and penal interest (and their associated GST)
• Negotiate with lenders for fee waivers, especially if you're an existing customer
• Choose simple loan products over complex ones with multiple service charges
• Read loan agreements carefully to understand all GST-applicable charges upfront
   

Read all about the features of a personal loan offered by Bajaj Finance Limited to understand how transparent pricing works.

The introduction of the GST caused considerable changes in the tax structure for personal loans. However, it is important to note that GST for personal loans is only applied to specified service components of your loan and has no effect on your main loan amount or interest payments.

If you choose your lender wisely and understand all charges upfront, the additional charges imposed by GST will not seem costly or overwhelming. The key is transparency, planning, and smart borrowing decisions.

Read all the fees and charges carefully and apply for a personal loan today with confidence, knowing exactly what you'll pay.