What is GST for Personal Loan?

Are you wondering why getting a personal loan is more expensive now than it was before the higher GST was imposed? Let me highlight that this can be because of GST. If you are curious about what GST is for personal loans, let me explain the same with you.

What is the GST Rate on Personal Loan?

Prior to July 1, 2017, when the Indian government enacted the Goods and Services Tax (GST), personal loans were liable to a 15% service tax. However, the new structure resulted in a 3% increase in the GST on loans. Therefore, the 18% GST on personal loan component must also be paid by borrowers availing personal loans. 

What is the Breakdown of GST on Personal Loan Interest?

GST on Personal Loans Processing Fees:

Lenders incur some administrative fees when they approve a loan application. An 18% GST is applied to the loan processing charge because it is a financial institution's service.

GST on Personal Loans’ Prepayment Charges:

Even though a personal loan has a predetermined payback period, most lenders let customers pay back the loan early in full or in part. They impose a penalty in exchange known as a prepayment fee. Financial institutions also provide loan prepayment, hence there is a GST component to the charge.

Therefore, if a lender imposes a 3% prepayment cost on a personal loan of Rs 1,00,000, the total prepayment fee will be Rs 3,540 (Rs 3,000 + 18% GST).

GST on Personal Loans’ Interest:

Lenders do not provide interest to borrowers, in contrast to loan prepayment and processing. Rather, it's a sum that borrowers pay back for the loan they take out at a certain interest rate. Therefore, the interest you pay on your personal loans is not subject to GST.

I hope this information helps you!

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