GST on Personal Loans 2025

Introduced in July 2017, GST is an indirect tax on the supply of goods and services. GST is not applicable to the principal of the loan or the interest that you repay. However, there is an 18% charge on certain service-related charges that are charged by the lender. These are discussed in the table given below:  

GST on Processing Fee 

The processing fee is a one-time fee. Lenders charge a processing fee to cover the costs of processing and approving the loan and disbursing the loan amount, which they then collect at the application stage. GST will apply to processing fees, whether it is charged as a percentage of the loan amount or as a fixed fee.  

Percentage Based Processing Fee 

Let's say you applied for a personal loan for Rs.5,00,000. If your lender is charging you a processing fee of 1% of the loan amount, then the fee is Rs.5000. On this Rs.5000 processing fee GST is payable at a rate of 18% inclusive.  

Calculation: 

1. Processing Fee = Rs.5000 

1. GST @ 18% =Rs.900 

1. Total = Rs.5000 + Rs.900 = Rs.5900 

As an example, it demonstrates to you that the overall cost of your loan increased by almost Rs.1000 upfront, before you even have your loan tenure begin. 

Fixed Processing fee 

In some circumstances, lenders charge a fixed processing fee, for example, a processing fee of Rs.6500 regardless of loan amount. Again, you will pay GST in the same manner.  

Calculation: 

1. Processing Fee = Rs.6500 

1. GST @ 18% = Rs.1170 

1. Total = Rs.6500 + Rs.1170 = Rs.7670 

In both situations, you must consider this in your upfront cost whether or not the processing fee is a fixed fee or a percentage calculation-the GST liability is there. 

GST on Prepayment Charges or Foreclosure Charges 

When you prepay your loan, the lender normally charges you for the foreclosure or prepayment. While GST applies to the charges, GST does not apply to the principal loan repayment. 

Example of Foreclosure 

Let's assume you have an outstanding loan of Rs.2,00,000, with the lender charging 3.5% as the foreclosure charge. The foreclosure charge, in this case, would be Rs.7000. (GST would be added as a percentage of this foreclosure charge). 

Calculation: 

1.    Foreclosure Charge = Rs.7000 

1.    GST @ 18% = Rs.1260 

1.    Total Amount = Rs.7000 + Rs.1260 = Rs.8260 

In this case, prepaying your loan to save interest will cost you a certain amount if you have to pay the foreclosure charge. Hence, if you're looking at simply the amount of interest you saved, you should check the amount of the foreclosure charge plus GST to determine if you did in fact save money by prepaying your loan. 

GST on EMI Bounce Charges 

EMI bounce charges are charged when you do not have enough funds in your bank account to cover a monthly instalment. EMI bounce charges are penal charges, and all penal charges attract GST at 18%. 

Example of EMI Bounce 

Let's assume the lender is charging Rs.450 for each bounced EMI. 

Calculation 

1. EMI Bounce Charge = Rs.450 

1. GST @ 18% = Rs.81 

1. Total Penalty = Rs.450 + Rs.81 = Rs.531 

These examples demonstrate how a small penalty could in fact add a significant amount to the total amount owing because of the tax component. 

GST on Late Payment Charges 

When you are charged for a late EMI payment, the late payment will be charged if the EMI is received past the due date as a charge against your account at the bank, and like across the board bounce charges, it will be subject to GST. 

Late Payment Example 

Suppose a late EMI payment due charge is Rs.500. 

1. Late Payment Fee = Rs.500 

1. GST @ 18% = Rs.90 

1. Total = Rs.500 + Rs.90 =Rs.590 

Continued failures to make your payments through repeated late payments can lead you to penalties or late fees. This can complicate your repayment by increasing costs along with the additional payment of GST. Making compliant or timely payments is the best way to manage your finances. 

GST on Outstation Collection or Manual Recovery Charges 

Many lenders have out of pocket charges on manual collections if manual collections need to happen because the borrower is in an outstation or rural location in addition to the automated EMI collections failing repeatedly. Those service charges are also subject to GST. 

Example 

Let's assume the manual collections charge is Rs.300. 

 Calculation: 

1. Collection Fee = Rs.300 

1.  GST@ 18% = Rs.54 

1.  Total = Rs.300 + Rs.54 = Rs.354 

To be fair, while charges are likely minor in isolation, these charges can accumulate rather quickly if there are multiple follow-ups or recovery visits. 

Understanding GST on Personal Loans  

Recognizing the GST implications for your loan enables you to make better financial decisions. Here is why:  

1. Financial Clarity: Consideration of GST on fees provides you with a more realistic view of the total cost of borrowing and allows you to avoid surprises on disbursement or repayment.  

1. Better Loan Offers: Understanding the implications of GST will allow you to compare lenders not only in terms of their rate of interest but also in their service or processing fees. A lender who is charging you lower processing charges is charging you less GST, since GST is calculated on the processing fee.  

1. Avoid Unnecessary charges: Knowing that bounce charges and late fees attract GST may be an incentive for you to be more disciplined with your payments and avoid adding to these costs. 

How to Reduce GST on Personal Loans 

GST is legally mandated, so it is inevitable to pay for the services rendered. However, there are some smart ways to minimize GST Liability. 

Work With Lenders Who Have Processing Fees Waived or Low 

Often with Lenders, they have promotional or seasonal offers where the Lender will waive their processing fee. If the fee is waived or low, the GST on that fee is also reduced, making it a cost-effective solution.  

Always Pay on Time 

Late payment fees are delays in payment fees. There is usually an additional GST for delayed payments. Paying your EMIs can easily help you save on penalties as well as GST on those penalties. Set your EMIs up for auto-debit or schedule a reminder so you will not incur late payment penalties, delays in payment fees and GST. 

Don't Foreclose without calculating the Real Cost 

While repaying early saves you extra interest, you may end up spending GST on foreclosure charges. Calculate all the charges before you foreclose a loan so you can make sure that you do not end up spending too much on GST. Always run the numbers before deciding to pre-close your loan to get the best deal.  

Account for all fees associated with the personal loan 

Lenders often advertise attractive interest rates on their product, but that does not mean that the product has low service fees. Compare the full fee structure, processing fees in addition to prepayment & penalties, to understand your total costs of borrowing in full. 

Advantages of GST on Personal Loans 

The following are the benefits of having GST on personal loans: 

1. Uniformity in Taxation: GST has eliminated many indirect taxes including the service tax, providing a level of uniformity and consistency. With fewer tax variations, it is easier for borrowers to understand the tax implications on their loans across locations and lenders. 

1. Enhanced Clarity: The GST is specifically noted in tax invoices and itemised fee structures. Borrowers see the specific amounts of their loan that have been taxed, and what percentage of these parts are applied to the services provided. 

1. Input Tax Credit on Business Use: In cases where a portion of the personal loan is used for business or professional purposes, eligible borrowers can claim the input tax credit on GST claimed. This benefit can be advantageous to self-employed professionals and small businesses.  

1. Encourages Responsible Borrowing: Since penalties and fees associated with late payments and EMI bounce also attract GST, it encourages borrowers to stay on top of their payments, thus avoiding unnecessary costs. 

Disadvantages of GST on Personal Loans 

The cons of GST on personal loans are as follows: 

1. Increased Borrowers Cost: While there isn't GST charged on the loan or interest, there are service-type fees that GST will apply to, increasing the overall costs of obtaining a personal loan and managing the eventual repayments.  

1. No Tax Benefit to Personal Borrowers: If a borrower takes a loan for personal use, the GST paid by the borrower around service charges cannot be claimed back. This is an additional non-recoverable cost to the individual borrower.  

1. Non-uniform Pricing: The lender will be able to state that the charges are either inclusive or exclusive of GST. Without a full disclosure, a borrower may miscalculate the actual upfront or penalty charges.  

1. Fixed and No Bargaining Power with the GST Rate: The borrower has no control over the GST rate set down by the government, meaning that even a small cost can be doubled with the 18% GST added. 

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