April 08, 2020
The One Country, One GST (Goods and Service Tax) idea is a groundbreaking one. It can change the whole of the country's tax system. GST refers to goods and services of all types. The term "Goods and Services Tax" means all kinds of goods and services are subject to GST. The Goods and Service Tax or GST was introduced by the Government of India on 1 July 2017 with the aim of implementing the one-tax policy of one country. This takes into the taxation realm all goods produced or sold and services provided in India; personal loans are one of those. GST's impact on personal loans is what every existing or prospective borrower ought to have a proper idea of. The banking sector offers other services that in the previous Service Tax regime is levied at about 15 per cent. The introduction of GST resulted in an increase in the service tax from the present 15% to 18%. It therefore influences all Bank facilities wherever a tax aspect occurs. When you intend to apply for a Personal Loan to satisfy any of your financial needs, let us discuss how GST affects the Personal Loan deals. Personal loans are among the most favoured loans for lenders due to their multiple intent suitability. It is also non-collateral. Although it is a fast source of funding, GST implementation impacts lenders differently than it did before.
But why is this so in the case of personal loans? Personal loans are the simplest of loans since less paperwork is required. The conditions for qualifying are equally clear. There's no need to hold the collateral. Therefore, there is no need to incur expenses such as charging and other costs which attract service tax. Implementing GST has little bearing on Personal Loans as the only region of influence is the composition of the processing fees. The utility charge on processing fees was 15 per cent in the previous regime. The tax burden on service charges has risen to 18 per cent with the introduction of GST. This means a 3 per cent increase in the processing fees for Personal Loan. Now, banks charge about 2 per cent of the amount of the loan as processing fees. Therefore you pay 10,000 as payment costs for a loan amounting to 5 Lakhs. You used to pay a service tax of 1,500, under the service tax system. Today, the rates have risen to 18 per cent with the introduction of GST. Hence, you pay a service tax amounting to 1,800. You can see therefore that this impacts the overall outlay by 300 Rupees.
Now, the next natural question is whether or not GST affects personal loan interest rates. You will be pleased to know that GST has no effect on the interest charged on your Personal Loans and also on all other loans. Hence, the EMI (Equated Monthly Instalment) has no effect. You can calculate the monthly EMI by using a Personal Loans EMI Calculator. It does involve other costs, though, such as fines for prepayment, late payment payments, mortgage charges, and so on. The penalties for prepayment range from 2 per cent to 5 per cent of the amount of payment. On this prepayment, there is a part of GST. Likewise, the amount of foreclosure faces fines between 2% and 5%. Such charges also trigger GST. Therefore, in these ways, the introduction of GST impacts Personal Loans. So how can you save on this GST amounts? Online, you can check the charges with different banks. Many banks offer higher processing fees, but strict prepaid and mortgage fines, while others have relatively lower charges for late payment of EMIs, etc. The GST impacts your Private Lending fields. Then, you should compare and arrive at the correct GST number. You don't have to furnish your Personal Loans collateral. Therefore, you save on GST on charges relating to legal document authentication, security assessment, development of a mortgage, etc. Therefore, one can ensure that there is minimal impact of GST on Personal Loans.
So what are the advantages and disadvantages of GST on your personal loans? The regulation comes with its own set of pros and cons, as GST on a personal loan is available in the 18 per cent bracket. A loan can be affordable since the processing fees and other necessary changes are small. Therefore the GST owed by a creditor will be just as zero. Just one tax is levied on the personal loan since GST introduction, instead of various taxes that were applicable earlier. And the best part is you pay the taxes in just one go. However, the primary disadvantage of GST on personal loans is that it has increased the applicable tax by up to 3%, thus increasing the amount you pay for personal loan fees & charges.
Now that we’ve covered the how and the why, let us address the where and what. There are a variety of applicable taxes that apply on personal loan charges. Processing fees are one such form of tax. It is the non-refundable amount charged by any financial institution for its customers to work on their cases as well as process their files. In other words, loan processing fees are the compulsory costs charged by the personal loan borrower upon delivery of the application. The personal loan processing fee is the one-time charge borrowers have to pay to lenders. Personal loan borrowers need to remember that the charging of processing fees does not necessarily mean acceptance of their applications. The processing of a personal loan offer is directly influenced, among other considerations, by an individual's ability to repay the loan.
Another type of applicable taxes is bounce charges. To understand this, one has to understand what a bounced cheque is. In a bid to make a payment to an individual or human, a drawer issues a cheque. It is a formal obligation to pay the drawee money by the box. When a bank fails to accept the check which was used for payment, the words "Cheque Bounce" or "Dishonoured Cheque" are used. There are many reasons for the bank denying payment: inadequate funds on the payer's bank account, missing or incorrect signature, scribbling, overwriting or omissions on the payer's check without permission (signature) and if a forged cheque is suspected. According to the Negotiable Instruments Act, 1881, if the bank dishonours a payment because of inadequate funds in the drawer's bank account, it is a criminal offence. In such a situation, the drawee bank sends to the bank of the payee a' Cheque Return Memo' which specifies the reason for the non-payment. Of exchange, the creditor of the payee surrenders to the payee the missed cheque and note. Now the payee has the option either to re-present the cheque within three months from the date on which it was reported or to sue the drawer lawfully. If the payee continues with the previous option and the drawer fails to make the payment even the second time then the payee has the right to sue the drawer. Nevertheless, the payee may sue the drawer only when paying off a loan or any other responsibility of the drawer towards the payee is the money listed on the dishonoured cheque. In such situations where the cheque was given out as a gift or to repay a loan to the payee, or for improper reasons, the drawer can not be charged.
Another taxable charge is the loans penal interest. Penal interest is the interest charged by the Mortgage Providers / Finance Companies if the mortgage or lease payments are not collected on the terms of maturity, as the case may be, by the completion of the payment schedule (month/quarter/year). The creditor will be charged interest at a negotiated rate in accordance with the terms of the deferred payments loan agreement referred to as punitive interest (a type of tax on outstanding payments).
There are personal loan foreclosure charges. Your personal loan foreclosure is the full reversal of your outstanding loan amount in a single payment, instead of paying the recurring instalments. Most banks (as a matter of course of market change) owe 4 per cent plus applicable taxes on your main personal debt outstanding for foreclosure. Finally, there are pre-payment charges. Pre-payment is a program that will help you repay your housing loan (in part or in full) if you have surplus funds until your loan term is over. It reduces the outstanding principal owed, and in effect increases the EMIs or the residual term on loans. A pre-payment calculator helps you know the effect of your home loan partial payment. Creating a prepayment or part-prepayment of your home loan will result in great savings over a long period of time, as well as a change in your current term and EMI mortgage debt. Keep these things in mind the next time you apply for a personal loan. Happy Loaning!