GST (Goods and Service Tax) can be taken as one of the most remarkable reforms in the Indian tax regime. With the whole idea of One Nation – One Tax – One Market, GST has had a significant impact on every sector of the economy, including the banking and financial services sector, where the GST is in the slab of 18% tax as against 15% tax before the implementation of GST.
The Good and Services Tax, or GST, is a move to simplify the tax structure of the country and bring in a unified tax regime. Being in effect from 1 July 2017, the GST has created quite a stir over the course of the last one year in both consumer economy and business sectors alike. While this new initiative was targeted at improving tax collections and gives a major boost to the Indian economy, here is how this concept has impacted the Personal Loans.
Personal Loans – the much-needed cash advance
For many, a Personal Loan is a blessing in disguise to tide over their financial emergencies. For people offer who have a stable income and who are employed with recognised private or public sector companies, Availing an Instant Personal Loan is a rather easy and straightforward process.
The fact is that a Personal Loan can be taken for multiple purposes and also it usually does not require collateral, and hence, this makes it a very popular form of personal finance. Also, with many banks making the process for Personal Loans online approval quick and easy, many people are finding it very convenient to apply for a personal loan.
However, with the implementation of the GST, there are some significant changes in the manner people now see Personal Loans. Here is a detailed discussion on what should matter and what shouldn’t with regards to GST on Personal Loans.
Implementation of GST and Personal Loans
There has been much ado on the implementation of GST in the banking and financial services sector. Of course, because of the GST, the banking and financial sector has moved from the tax slab of 15% to 18%, the fact is this isn’t a real significant difference.
On Personal Loans as such, the implementation of GST has mainly not brought any significant impact. There is an increase of 3% on the service tax but that doesn’t apply to all aspects of your loan and hence, the whole process of Personal Loans stands unchanged.
The first thing to make a note of here is that the GST will not affect the EMIs (Equated Monthly Instalments) of Personal Loans at all. That is because the tax is not levied on EMIs generally whether it is the EMI for a Personal Loan, Home Loan or an auto loan. However, the one-time cost that includes the processing fee, prepayment charges, and all such expenses related to the Personal Loan get affected with GST as these costs are paid to avail the service of the loan and hence, a 3% increased tax is what you will need to pay.
The actual increase in the service charges for Personal Loans due to GST
As mentioned above, the only impact of GST in case of Personal Loans is visible in the payment of the service charges (one-time). While the EMIs don’t get affected, the prepayment charges that banks usually charge at 2% to 5% of the outstanding loan amount, which is a taxable expense, gets impacted by Car Site.
So, typically if Mr. X has an outstanding Personal Loan of Rs. 7 Lakhs, then the prepayment charges as levied by the bank, based on the 2% to 5% rate would range between Rs. 14,000 to Rs. 35,000. The service tax on this charge, if calculated at 15% is between Rs. 2,100 to Rs. 5,250. Now, with the GST, the service tax rate moves up to 18%, and hence, the tax now would be Rs. 2,520 to Rs. 6,300. This amounts to a difference of about Rs. 420 to Rs. 1,050.
The impact of GST on the processing fees
The processing fee that is typically charged by all banks is about 1% to 2% of the loan amount in addition to the service tax. Before the implementation of GST, the service tax was 15%, and that was the amount of tax charged on the processing fees. Post implementation of GST, this tax rate has increased to 18%.
To understand the difference in numbers, let us assume that Mr. X has a personal loan of Rs. 5 Lakhs. The processing fee, at 1% to 2%, ranges between Rs. 5,000 to Rs. 10,000. The service tax on this amount before implementation of GST would amount to Rs. 750 to Rs. 1,500. Post GST, the service tax on the same amount is Rs. 900 to Rs. 1,800. While there is an increase, it is for sure not a significant amount that can affect the borrower’s capacity to take a Personal Loan for Used Car.
Implementation of GST has indeed brought an increase in the services charges for processing fees and prepayment charges associated with Personal Loans; however, the fact is that the increase is not too overwhelming for the borrowers.
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