Impact of GST on personal loan Snneha Lukka july 6, 2019
Impact of GST on personal loan
The Goods and Service Tax Bill was passed in Lok Sabha in AUGUST 2016 and came into being from 1 st July, 2017. With the GST regime, indirect taxes such as sales tax, service tax, excise duty and other local and state taxes subsumed into one single tax, making the taxation process simple and easy to understand. Before the implementation of GST, the banking sector attracted 15% service tax, however, with the new tax reform, currently 18% tax is levied on banking services. With personal loan being one of the popular loan products, let us read in detail about the impact of GST on it.
What is personal loan?
Personal loan is a collateral-free loan that is offered on the basis of your eligibility criteria i.e. credit score, income, job type and other factors. This type of loan does not require you to pledge any of your assets and is to be repaid on a monthly EMI basis. Since this loan is of unsecured type, the interest for this type of loan is usually higher than secured loans. This loan can be utilized for meeting any unexpected financial events such as medical emergency, paying off education fee, home renovation or others.
How GST has impacted the personal loan segment
The personal loan segment in India has not undergone a major change with the implementation of GST. The service tax that was levied at 15% earlier is now levied at 18%. Generally, tax is not levied on the EMIs that you pay towards your personal loan. EMIs include the principal amount and the interest that you pay towards the loan amount. With GST, there has not been any impact on EMI amount, but on the miscellaneous costs such as processing fee, pre-payment charges, late payment charges, foreclosure charges and others. In case of processing fee, banks generally charge 2-3% of the loan amount plus the service tax. For instance, in case of loan prepayment charges, loan of Rs. 7 lakhs would attract service charge (@15%) of Rs. 2100- Rs.5250, whereas, today with GST in the form, the service tax on loan of the above amount would be between Rs. 2520-6300.
Impact of GST on personal loan interest rate
Goods and Service Tax does not have any impact on personal loan interest rates due to which there is no change in personal loan interest rates. Other charges such as foreclosure, late payment, prepayment are affected with the GST regime.