GST on Loans: Processing and Service Tax Explained
Loans are an essential part of financial planning — whether it’s a personal loan, home loan, or business loan. But when it comes to taxation, many people are unsure about the gst on loan. Is GST charged on interest? What about processing fees? Let’s clear up the confusion.
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Is GST Applicable on Loan Amount or Interest?
No, GST is not charged on the principal loan amount or on the interest charged by banks or NBFCs.
- The loan amount is not a supply of goods or services, so it’s not taxable.
- The interest on loan is considered a financial service and is exempt from GST.
So, whether it’s a home loan or a gst for personal loan, you don’t pay GST on the actual money you borrow or the interest you repay.
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GST on Loan Processing Fees
Here’s where GST does apply. Banks and financial institutions usually charge a processing fee, which is a one-time charge for handling your loan application. This fee is considered a taxable service.
GST on loan processing fee is charged at 18%.
Example:
- If your processing fee is ₹5,000, the GST charged will be ₹900.
- Total payable = ₹5,900
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Other Loan-Related Charges That Attract GST
While interest is exempt, several loan-related charges attract GST:
| Charge Type | GST Rate | GST Applies? |
|---|---|---|
| Loan processing fee | 18% | Yes |
| Documentation charges | 18% | Yes |
| Pre-payment charges | 18% | Yes |
| Foreclosure charges | 18% | Yes |
| Late payment penalty | 18% | Yes |
| Loan cancellation charges | 18% | Yes |
All these are considered financial services and are taxable under GST law.
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GST on Personal Loans
Let’s look specifically at the gst for personal loan:
- No GST on loan amount
- No GST on interest
- 18% GST on processing and admin fees
This structure applies whether you take the loan from a bank or an NBFC.
Business Loans and Input Tax Credit
If you’re a business owner and you take a loan for business purposes:
- You can claim Input Tax Credit (ITC) on the GST paid on charges like processing or foreclosure, if these services are used for business.
- However, if the loan is taken for personal or exempted activities, ITC cannot be claimed.
Conclusion
To sum it up, gst on loan does not apply to the loan amount or interest — but it does apply to processing fees and other service charges, typically at 18%.
Understanding this can help you avoid surprises when you apply for a loan and even claim Input Tax Credit if the loan is for your business.
As a Chartered Accountant with over 12 years of experience, I am not only skilled in my profession but also passionate about writing. I specialize in producing insightful content on topics like GST, accounts payable, and income tax, confidently delivering valuable information that engages and informs my audience.
Frequently Asked Questions (FAQs)
- Is there GST on loan interest?No. Interest on loans — whether personal, housing, or business — is exempt from GST.
- What is the GST on loan processing fee?The standard GST rate is 18% on all loan-related processing or administrative fees.
- Can I claim ITC on GST paid on loan charges?Yes, if the loan is used for business purposes and the borrower is registered under GST.
- Do NBFCs charge GST like banks?Yes, both NBFCs and banks charge 18% GST on service fees related to loans.
- Is GST applicable on credit card EMIs?Yes, any processing or handling fees on credit card EMIs attract 18% GST.
