Personal loans are an ideal way to finance your education, medical emergency or even home renovation plans. Many banks offer a personal loan without collateral and competitive interest rates. For instance, Kotak811 offers personal loan interest rates from 10.99% p.a., and you get instant access to the funds.
Taxes are an essential component of the personal loan. There are many services where taxes are exclusive of the amount applicable. With the change in India’s tax system, many users are wondering how it will impact the loans. In this article, we will explain the impact of GST rates on personal loans in detail.
GST - what does it mean?
The Goods and Services Tax is the successor of the VAT, which was formerly levied in India on the provision of goods and services. VAT and GST use the same taxing slabs. It is a comprehensive, multistage, destination-based tax, which includes practically all indirect taxes except a few state levies.
Significance of gst in financial sector
GST holds great significance in the financial sector. Here is a brief breakdown of how it impacts the different financial sectors.
Insurance
Life insurance, as well as ordinary insurance, like fire insurance, automobile insurance, theft insurance, and so on, are subject to the Goods and Services Tax unless otherwise excluded by law. Insurance premiums are now subject to 18% GST which was 15% previously.
Loans
Loans have also become more costly after the introduction of GST. Loans were previously subject to a 15% service tax, which has now been raised to 18%. While there is no GST on business loan interest rates, processing expenses have increased, making company loans more costly.
Mutual funds
Asset Management Companies (AMCs) incurred expenditures that affected the scheme's Net Asset Value (NAV), which were subject to a 15% service tax. Following GST implementation, service costs increased by 3%, raising the expense ratio of mutual fund institutions throughout the country to 18%.
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Impact of GST on components of personal loans
Personal loans have various components, like principal amount, interest rates, pre-payment charges, and processing fees. The principal amount does not attract GST. Here are the impacts of GST on personal loan components:
Prepayment charges
A prepayment penalty is a fee that lenders demand if you pay off a portion of your personal loan in advance. Kotak811 charges up to 20% of the principal loan outstanding as a prepayment charge once per financial year. Rs. 500 + taxes are also charged for every instance.
For example: If you borrow a loan amount of Rs 2,00,000 and the pre-payment charges are 5%, it will be a total of Rs Rs 10,000, and with GST at 18%, you will be required to pay Rs. 11,800 as a prepayment fee.
Processing fees
A processing fee is a charge levied by a lender to cover the administrative costs of handling a loan application. It is usually a percentage of the loan amount and is added to the total loan amount. Kotak811 charges a processing fee of up to 3% of the loan amount + taxes.
For example: If you borrow a loan of Rs. 2,50,000 and the processing fee is 2%, then the processing fee will be a total of Rs. 5000, and with GST on the loan processing fee at 18%, you will be required to pay Rs .5900 as a processing fee.
Interest rates
GST is not levied on loan interest. Before the implementation of GST, service taxes were charged on loans. The service tax rate was 15%, while the GST rate was 18%. Because the change in the tax plan resulted in a 3% increase, some individuals may have expected interest rates to rise as well. However, no GST is imposed on loan EMIs or interest payments. It will only be assessed on the processing and additional fees.
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Advantages of gst on personal loan
These are the advantages of GST rate on personal loan:
Uniform taxation :
GST combines several indirect taxes into a single tax framework, resulting in a more consistent taxing structure. This simplification can simplify the tax system for personal loans, allowing borrowers to better understand and comply with tax requirements.
Lower cost of borrowing :
Banks may be able to lower the overall cost of providing personal loans. These savings could be passed on to borrowers in the form of lower interest rates and reduced processing fees, making personal loans more affordable for individuals.
Increased formalisation:
Lenders operating within the formal economy are more likely to adhere to regulatory standards and consumer protection laws, providing borrowers with greater security and recourse in case of disputes or issues with their personal loans.
Disadvantages of gst in personal loans
These are the disadvantages of GST on personal loan:
Complex tax calculations:
The implementation of GST introduces additional complexity in tax calculation for financial institutions offering personal loans. Determining the correct amount of GST to apply to various loan components, such as interest charges, processing fees, and other associated costs can be challenging.
Additional financial burden:
While GST may lead to cost savings for lenders through input tax credits, these savings are not guaranteed to be passed on to borrowers. In some cases, lenders may absorb the benefits of GST internally, resulting in no direct reduction in personal loan costs for borrowers. It could potentially lead to higher overall borrowing costs for individuals.
Less affordable
GST on personal loans may disproportionately affect financially vulnerable individuals or those with limited access to formal banking services. Higher borrowing costs resulting from GST could make personal loans less affordable for low-income borrowers, potentially hindering their ability to access credit for essential expenses or financial emergencies.
The products and Service Tax (GST) has been praised as one of the most significant taxation changes, simplifying the previous tax systems imposed on products and services in the country. While most people are understandably concerned about the impact on specific services, such as GST on personal loans, the amount to be paid is not excessive.
Kotak811 loans are far more inexpensive, even when accounting for GST rates. Apply today by visiting our website or downloading the loan app.
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This Article is for information purposes only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank makes no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. The information contained in this Article is sourced from empanelled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees, and contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.
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