Impact of Lower Interest Rates & GST on Home Loan & Personal Loan

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The interest rates in India are currently at multi-year lows as a result of which opting for a loan is getting cheaper and cheaper. The rates of interest on loans is so cheap that affording a house is no more a rich man’s luxury but is something which is in the common man’s reach.

It is after a long gap of 6 years that the interest rates have been at such low levels. During these 6 years, the interest rates have fallen by more than 1.5%. From almost 10.5% which was the prevailing interest rate a few years back, the home loan interest rates have now fallen to almost 9.5%.

The interest rates could be even lower if you are a female or if you have a very good credit history.

Even a small reduction in the interest rates have a big impact on the home loan EMI’s repayment. The following chart explains the same:-

Particulars Interest @ 10.5% Interest @ 9.5%
Loan 50 Lakhs 50 Lakhs
Years 20 20
EMI 49,919 46,607
Total Interest payable 69.80 Lakhs 61.85 Lakhs

On a loan of 50 Lakhs for 20 years, a 1% decrease in interest rates leads to a savings of Rs. 8 Lakhs. In some cases, the fall in the interest rates has been even more than 1%.

A lot of people think that this 1% decrease in interest rates has been offset by the increased rate of 18% GST as compared to 15% Service Tax. However, this is not the case as GST/ Service Tax is not levied on the whole amount but is levied on a very small amount in case of Loans.

Service Tax on Loans replaced by GST on Loans

Earlier Service Tax was levied on Loans which has now been replaced by GST which would now be levied on loans. The rate of Service Tax was 15% whereas the rate of GST is 18%.

A lot of people are of the opinion that the effective cost of having a loan would increase as the rate of GST is 3% higher than the rate of Service Tax. Several people are of the opinion that their EMI’s would increase as the rate has been increased by 3%.

However, this is not the case as GST is not levied on repayment of loan or on payment of Interest on Loan. GST is only levied on the processing charges and any other charges paid to the bank excluding the principal repayment and interest payment. These other charges include the Loan Processing Fees, Loan Prepayment Charges and other charges, if any.

As a major chunk of the loan repayment comprises of principal repayment and interest payment, the impact of GST on Loans would be very negligible.

The impact of GST on Home Loans and Personal Loans has been explained below for a much better understanding of the impact.

GST on Personal Loans

In case of Personal Loans, the banks normally charge a processing fee of 1% to 2% of the loan amount. Therefore for a loan of Rs. 9 Lakhs, the processing fees would be Rs. 9000 (assuming it as 1%).

On this Rs. 9,000, earlier service tax was levied @ 15% which is Rs. 1,350 but now GST @ 18% would be levied which is Rs. 1,620. Therefore, there is an increase of Rs. 270 only on a loan amount of Rs. 9 Lakhs. If the processing charges are 2%, the increase would be Rs. 540.

There would be a similar impact on the prepayment charges as well. In the pre-gst era, the prepayment carried a charge of 2% to 5% of the outstanding amount + applicable taxes. So, if the outstanding amount is Rs. 2 Lakhs, the prepayment charges would be Rs. 4000 (assuming 2% charge).

Earlier Service Tax @ 15% was applicable i.e. Rs. 600 but now GST @ 18% would be applicable i.e. Rs. 720. Thus there is an increase of Rs. 120 assuming a 2% prepayment charge. Assuming the prepayment charge to be 5%, this increase would be Rs. 600.

The above mentioned charges are one time charges only and are not recurring in nature.

GST on Home Loans

There would be a similar impact of GST on Home Loans on the same lines as the impact of GST on Personal Loans i.e. GST would only be levied on the processing fees and prepayment charges (if any).

The processing fee in case of home loans is 0.25% to 1% of the loan amount. So on a loan of Rs. 50 Lakhs, the processing fees would be Rs. 12,500 (assuming 0.25%).

On this amount, earlier Service Tax @ 15% i.e. Rs. 1,875 was levied but now GST @ 18% i.e. Rs. 2,250 would be levied. So there is an increase of Rs. 375. Assuming the processing fees of 1%, the increase would be Rs. 1500 only.

Similarly, GST would also be levied on prepayment of Home Loan. However, it would only be levied on the charges levied by the bank and not on the total amount paid. Moreover, the increase would only be 3% of the bank charges.

Karan is CA by Qualification with the rare distinction of being awarded All India Rank 22. He is also the founder of this website and loves to help people with their Tax Queries.