Impact of GST on Home Loan EMI & Interest Rate

The Indian government introduced the Goods and Services Tax (GST) in India in 2017. The new tax regime subsumed several indirect taxes, including excise duty, service tax, and VAT. It is a destination-based, multi-stage tax levied on the supply of goods and services. The majority of the goods and services in India are now taxed under the four major GST slabs of 5%, 12%, 18%, and 28%.Is GST applicable to home loans? What about GST on other loan-related expenses? Here’s everything you should know about GST on home loan-

In the past, service tax @15% was applicable on home loans. But GST has now subsumed service tax for almost all the goods and services, including home loans. In the case of an under-construction home, GST @12% is applicable on home loans. If it is a ready-to-move-in property, GST @18% will be applicable.However, it is worth noting that GST does not apply to the loan amount or the monthly EMIs. It should only be paid on the processing fees and other loan-related expenses, such as prepayment charges, late payment charges, etc.

As loan processing is a type of service offered by the lender, it comes under the purview of GST. The loan processing fee can range between 0.25% to 2% depending on the loan provider you select. GST @18% or @12% will be applicable on the processing fee based on whether it is a fully constructed or under-construction property.For instance, if you are taking a home loan of Rs. 50 lakhs for purchasing a fully constructed residential property, and the processing fee charged by the lender is 1% of the loan amount; the processing fee would be Rs. 50,000.GST @18% will be applicable on the processing fee. So, the GST here would be Rs. 9,000. The total processing fee paid to the lender will be Rs. 59,000 (processing fee + GST).

As mentioned above, GST on home loan is also applicable on other loan-related expenses, including prepayment charges, partial-prepayment charges, document handling fees, etc. These additional charges are generally a fixed fee or a certain percentage of the loan amount.For instance, if you have taken a fixed rate home loan that you’d like to prepay, a lender can have a prepayment penalty of up to 2%. GST @18% will apply to whatever the penalty amount is. The same is true for all the other loan-related expenses.

Under the previous tax regime, service tax @15% applied to the processing fee charged by home loan providers. However, this has now been increased to 18% for fully constructed homes under the GST regime, making home loans slightly more expensive for the borrowers.But for under-construction homes, the tax has been reduced to 12%. So, compared to the previous tax regime, it can offer some savings if you purchase an under-construction home.

While the GST rate is fixed at 18% and 12% for home loans, you can reduce the total tax amount you pay while taking a home loan by comparing the processing fee charged by the lenders. As discussed above, GST applies to the processing fee and other charges levied by the lender. Therefore, if the charges are lower, GST will reduce automatically.For instance, if we take the same example from above, GST is Rs. 9,000 on a processing fee of 1% or Rs. 50,000. But if the lender charges a processing fee of 0.75%, the processing fee would be Rs. 37,500, and the GST would be Rs. 6,750. The total processing fee + GST, in this case, will be Rs. 44,250.