Credit Cards: Can banks levy GST on interest component of personal loan EMIs?

If you want to raise an instant loan to meet immediate financial need which could range from a medical emergency to paying for a vacation, make sure that you get the best deal possible.

One of the key factors to consider is that the interest on personal loan does not carry any GST on it.

When a personal loan is granted by a financial institution aka a bank, the principal amount as well as interest is exempt from any additional tax such as Goods and Services Tax (GST).

However, when the bank offers a pre-approved loan against the credit card limit, the interest portion may be subject to the GST. The principal amount will, meanwhile, not be subject to any tax.

GST on interest

It is noteworthy that the Calcutta High Court had decided last year that the loan given to credit card holders should be treated as a normal loan and will not attract GST. However, the interest component is not covered by the exemption notification and will, therefore, attract GST.

The rate of GST on interest on these loans is 18 percent, thus adding to the overall EMI burden.

Loan applicants are, therefore, meant to factor in additional cost before opting for a loan.

Let us understand this with the help of an example:

Suppose someone borrows ₹3 lakh at 12 percent interest for 3 years. On this, one will have to pay an EMI of ₹9964.29. This will be amortisation schedule for first three months

(Source: https://www.livemint.com/loans/personal-loan-emi-calculator)

In the first month, GST at the rate of 18 percent (18/100 X 3,000 = 540) will be added to the EMI, thus raising it by ₹540.

In the second month, the tax component will be 18/100 X 2,930.36 = 527, thus raising the EMI by another ₹527.

And in the third month, the indirect tax will be 18/ 100 X 2,860 = 514. As we can see the GST component keeps declining with time along with interest.

In fact, GST is levied on the interest component of EMIs on credit card purchases. The tax kicks in only when the interest is part of an EMI which is given towards the credit card payment.

For any other non-credit card loan, the interest component is exempt from GST.

"The interest component on credit card services is not exempt from GST. There is a levy of 18 percent GST which is over and above the interest on credit card transactions," says Deepak Aggarwal, a Delhi-based chartered accountant and financial advisor.