Application of GST on Different Financial Charges of Loans and Credit Cards

Last Updated : June 6, 2020, 11:44 a.m.

Since Independence, India has seen many tax reforms to make the taxation structure of our country more transparent to the citizens of the country. But the introduction of the Goods and Services Tax (GST) on July 1, 2017, is undoubtedly the biggest reform that this country has witnessed in a very long time. Before its introduction, there were several state and central taxes that were causing too many problems in the overall taxation system. GST has helped in making the overall tax regime more unified and transparent.

But many are finding it tough to understand the overall taxation system in the GST regime. Especially, individuals are having so many doubts when it comes to the implication of GST on different financial charges on the loans and credit cards. These are two of the most popular financial products in the financial market. So, in this article, we will be telling you everything about how the GST applies to different financial charges related to loans and credit cards. If you are one of them who is having confusion regarding the impact of GST on these two facilities, this article could help you clear your doubts. So, without any further delay, let’s start reading!

GST on Credit Cards

Credit cards are one of the most popular financial products among the users, and since the implementation of GST, there are a number of users who are having several doubts related to it. Credit Cardholders use their cards in purchasing the things they like and repay the amount within a fixed due date. GST is levied at 18 percent, whereas before this, service tax was levied at 15 percent. There is an important thing that an individual should remember that GST will have no additional impact on the users who utilize their credit card carefully and intelligently.

Below, you can have a look at all the components of Credit Cards such as Interest charges, Late Payment Fee, Processing Fee and Annual Fee.

Late Payment Fees

As you know that after making a transaction with your credit card, you need to pay this amount back within the due date. So, if you are a smart user and pay your credit card bills on time, there is no way that GST will be levied and your credit card usage will not be affected.

GST is not levied on the total outstanding amount. But when you pay this amount after the due date, it will be levied on the late payment fee charged this outstanding amount. This late payment fee will be charged only if you fail to pay even the minimum due amount (usually 5% of the total outstanding amount) within the due date. This late payment fee tends to vary from the outstanding amounts on your credit card. Let’s understand this through an example.

Suppose you have a total outstanding amount of INR 5,000 and you fail to pay it within the due date. The late payment charges for this amount will be INR 600.

So, the GST of 18% will be levied on this amount (INR 600) only which means it will be INR 108.

Processing Fee on Credit Card EMI

Credit Cards also help individuals in converting their big-ticket purchases into smart EMIs. So, you can buy anything you want and repay the total amount in easy monthly installments within a fixed tenure of 6/ 9/ 12 months or more according to your convenience. On availing the Smart EMI Facility, you will need to pay a certain one-time processing fee for this.

This processing fee generally tends to change from one lender to another and you will need to check it from your lender.

Let’s understand the implication of GST on processing fees. through an example. Suppose, you bought a mobile phone worth INR 24,000 with your credit card and choose to convert this transaction into easy monthly installments of tenure of 9 months. The lender charged you a one-time processing fee of INR 299 for this transaction.

So, the GST of 18% will be levied on this amount (INR 299) which will be INR 53.82.

Interest Amount on the Total Outstanding Amount

When you make any transaction with your credit card, you will get an interest free period which usually ranges from 30 to 50 days. This interest-free period will not be applicable if you withdraw cash from your credit card. If you manage to pay the total outstanding amount on your credit card within the due date, you will not need to pay any interest on this amount. But if you don’t pay the total due amount, the balance amount will start to revolve and interest will be charged on this amount.

Also, GST charges of 18% will be levied on the interest of the total outstanding amount. Credit Card interest rates generally range from 30% to 40% per annum if you don’t pay your dues on time.

Overlimit Charges

Each individual has a fixed credit limit on the credit card he or she has. The credit limit is fixed by the lender according to the overall profile and credit score of that individual. But some lenders provide their customers the option to use their credit card beyond their limit. For this facility, lenders charge a certain amount known as the Overlimit Charges on your Credit Card.

This Overlimit charge is different from one lender to another and the GST is levied on this charge only. Suppose the overall limit of your Kotak Urbane Gold credit card is INR 60,000 and you use beyond this certain limit. The overlimit charge for this card is fixed at INR 500.

So, the GST on this amount will be 18% of INR 500 = INR 90

Annual and Renewal Fee

For each credit card, you take from any lender, there is a certain annual fee and renewal fee on the card. The annual fee is charged once, while the renewal fee is charged every year. Both of these fees can vary from cardholder to cardholder, from one lender to another lender, and from one credit card to another card.

The lender will tell you about these charges at the time of applying for the credit card you want. It will clearly state whether the GST charges are included in the annual and renewal fees of your credit card or not. Suppose you choose a credit card that has an annual fee of INR 999 including applicable taxes. This means that you don’t need to pay any GST charges on this fee. If it states that amount plus applicable taxes then you will need to pay GST of 18% on the annual fee of your credit card.

Cash Payment Fees

You can pay your credit card bills via both online and offline methods. If you choose to pay the outstanding credit card bill via the offline method, there will be a charge that you will need to pay for this service. This fee is known as the Cash Payment Fee as you will be depositing the bill amount to the branch of your respective lender by mentioning your credit card number and the due amount in the pay-in-slip. This fee will change from one lender to another. For example, State Bank of India (SBI) charges a cash payment fee of INR 199 on all its credit cards.

So, the GST levied on this amount will be INR 35.82.

Cash Withdrawal Charges

You can also withdraw cash with the help of your credit card but there is a thing you need to remember that there is no interest-free period on such transactions from your credit card. When you withdraw cash from your card, a lender charges a certain transaction fee on this service. This is known as the Cash Withdrawal Charges and it may vary from one lender to another. GST of 18% will be levied on the cash withdrawal charges on your credit card.

Apart from this, the interest amount on your cash withdrawal starts to charge from the very day when you withdraw the cash. And the GST of 18% will also be levied on the monthly interest amount charged on your withdrawn amount till the time you pay it back.

GST on Loans

Apart from Credit Cards, loans are also one of the most popular financial products that individuals opt for. A loan can help an individual in overcoming the financial emergency that he or she has been facing. There are many kinds of loans that banks and financial institutions provide that an individual can opt for such as Personal Loan , Home Loan , Vehicle Loan, Business Loan, Education Loan , etc.

Before GST was implemented, the service tax of 15% was used to levy on all these loans. But after its implementation, a 15% service tax is replaced with a unified GST rate of 18% on all kinds of loans. The two main charges related to the loan on which GST will be applied are Processing Fees and Prepayment Charges. We are providing you details about these two below. Check them out!

Processing Fees

When you opt for any kind of loan, lenders charge a certain processing fee on the facility. Not only the processing fees tends to vary from one lender to another, but also on the loan type and the loan amount you are availing for. On this processing fee, you will need to pay GST charges of 18%. As we told above, before this, a service tax of 15% was used to levy on this fee. As you can see, the hike is only of 3%

The processing fee on a personal loan generally ranges from 1% to 2% of the loan amount plus GST, whereas on a home loan, this fee ranges from 0.25% to 1% of the total loan amount plus applicable GST. So, you will need to pay GST charges of 18% on the processing fee. Let’s understand this via an example.

Suppose an applicant decides to opt for a personal loan of INR 5 lakh. So, the processing fee on this loan amount will be INR 5,000 to INR 10,000.

So, the estimated GST on this amount would be INR 900 to INR 1,800 that will make the total processing fee = INR 5,900 to 11,800.

Prepayment Charges

Sometimes, when an individual wants to pay the outstanding loan amount before the fixed tenure then he or she can do it by paying a small charge. This is known as the Prepayment charge and the most important thing on which it depends is the Outstanding Loan Amount. An individual can pay the full amount to save the interest amount that he or she will be paying in the remaining tenure.

Prepayment charges generally tend to vary from one lender to another. In the case of a home loan, there are zero prepayment charges if you have opted for a Floating rate of interest. In the case of fixed-rate loans, the prepayment charges range from 2% to 3% of the principal outstanding plus applicable GST. Similarly, prepayment charges for a personal loan range from 2% to 5% of the outstanding balance plus applicable GST.

Let’s understand this with an example. Suppose an applicant wants to prepay the outstanding amount of INR 3 lakh. So, the prepayment charges for this amount will be INR 6,000 to 15,0000 plus 18% GST.

So, the estimated GST on this amount would be INR 1,080 to INR 2,700 that will make the total processing fee = INR 7,080 to INR 17,700

So, this is how the GST charges are levied on the various fees and charges related to the Loans and Credit Cards. We hope you must have got a fair idea of all these GST-related charges by now.