Personal loans have become a popular choice amongst people to fulfill essential or luxury needs. As the name suggests, personal loans can be borrowed for personal reasons and used flexibly. A person can take it to go on a vacation, renovate their home, or buy a luxury item. Banks and NBFCs offer these special loans to anyone who requires urgent cash. These kinds of loans also come as a great relief for people who need emergency money in a short span of time. The easy eligibility criteria and minimal document requirements make personal loans readily available to most people.
While applying for them is a hassle-free procedure, the introduction of GST has affected loans a little. It has increased the amount of tax payable on a loan. Let’s understand GST applicable on personal loans in depth.
Understanding GST
The government of India has implemented the Goods and Services Tax, broadly known as GST, with effect from 1st July 2017. Although GST was initiated in 2000, it took seventeen years to come into action. Ever since coming into the picture, it has completely transformed India’s tax system.Before GST was introduced, several taxes existed in India, such as excise tax, service tax, customs tax, VAT, and others. GST has been introduced with the aim of achieving the ideology of ‘One Nation, One Tax.’ The idea of implementing GST was to eliminate multiple tax slabs and simplify the entire process.
Impact of GST on personal loans
Like any other sector, the new taxation regulations have also impacted the banking sector. The banking and financial sector has found itself in the slab of 18% under the GST structure. Earlier, it was under the slab of 15% service tax. This slab change has resulted in a slight increase in loan taxes. Personal loans remain no exception to this.
Personal loans are one of the most popular loans in the market today. They come inclusive of a couple of charges. Among the other charges, one very significant fee is the processing fee. The processing fee of a personal loan is 1-2% of the loan amount. Over the processing fee comes service charges. Service charges before the implementation of GST were 15%. Ever since the implementation, service charges of a bank loan comes under 18% tax.
While it may look like the 3% increase in the tax percentage on loans has made them expensive, the difference is not much. The impact of GST applied on an instant personal loan is negligible as it is not applied to the loan repayment’s interest but rather to the processing charges, pre-payment charges, and other charges paid to the lender at the time of taking the loan. If you are planning to apply for a personal loan and want to understand more about how GST is calculated on a loan, you will be able to do so with the help of the example given below.
How is GST calculated on personal loans?
GST has undoubtedly affected the calculation of taxes on personal loans. Let’s understand the personal loan GST rate in a little more depth by considering the following scenario:
Let’s assume that you are taking a personal loan of INR 1,00,000. You are required to pay the processing fee of 1% of the loan amount and the pre-payment fee of 2% of the outstanding principal amount to the lender.
| Fees charged by the lender on a loan of INR 1,00,000 | Amount payable to the lender | Fees with 15% Service Tax applied (pre-GST) | Fees with 18% GST (Now applicable) | GST – Service Tax(Impact of GST) |
| Processing fees (1%) | 1000 | 150 | 180 | 30 |
| Pre-payment fees (2%) | 2000 | 300 | 360 | 60 |
As seen in the above example, the difference between the tax applied on personal loans earlier and after the implementation of GST is not that high and almost negligible. The impact of GST on personal loans is minor, and you can apply for an instant loan without worrying about the changes in the tax application. A 15% tax rate on personal loans is not much different from 18% (GST) now.
Applying for a personal loan –
Eligibility Criteria
Once you understand the breakup of GST on a personal loan and are ready to apply for it, make sure that you meet the eligibility criteria to apply for an instant personal loan. Fortunately, the list isn’t long and covers most people. The criteria include:
- The applicant shall be between 21 to 65 years of age
- The applicant shall be a citizen of India
- CIBIL score of 750 or higher
- The applicant shall be a salaried employee or have a regular source of income and documents to verify it
- Meet the minimum income criteria as per the lender
Documents required
Suppose you meet the eligibility criteria to apply for a personal loan and want to proceed with the application. In that case, you must be wondering what documents you will be required to present to the lender to obtain the loan. Following is the list of documents necessary while applying for an instant loan:
- Identity proof – Aadhaar card, passport, voter ID card, driving license, etc.
- Address proof – Aadhaar card, passport, utility bill, ration card, etc.)
- Bank statements for the past 6 months
- Salary slips of the last 3 months or ITR
Conclusion
The enforcement of GST has brought a change to all sectors. Introducing it primarily aimed to eliminate the cascading effect of taxes. It has successfully simplified the application of taxes on various services. While there has been a debate on how the GST has impacted different sectors and whether it has increased the prices or not, the impact of GST on personal loans is a marginal one. It is undeniable that GST has brought a little change to the application of taxes on personal loans, but the amount is not concerning. Applying for an instant personal loan remains one of the best options if you need urgent money without worrying about the change in taxes.
