GST Changes 2025 – Tax Benefits on Personal Loans Explained
India's Goods and Services Tax (GST) has undergone one of the biggest reforms in 2025, often referred to as GST 2.0. The earlier four-tier system of 5%, 12%, 18% and 28% has now been simplified into just three slabs i.e 5%, 18%, and 40%. This change is designed to make taxation more transparent, reduce household expenses on essentials, and boost overall consumption.
While GST primarily impacts goods and services such as food, electronics, healthcare, and luxury items, it also has indirect effects on financial services like personal loans.
Many borrowers are now curious to know: Will my personal loan EMI get cheaper? Do banks still charge GST on processing fees? What about loan insurance premiums?
In this article, we will explain how the new GST rules affect personal loans, what stays the same, and where borrowers can actually gain tax benefits.
Are Personal Loans Directly Affected by GST?
A personal loan is classified as a financial service, which means GST rules apply differently compared to goods and retail products. The key thing borrowers must understand is that GST does not apply to the loan amount or the interest charged on EMIs. Your monthly installment is considered a financial transaction, not a taxable supply of goods or services.
However, GST does apply to certain fees and charges that banks and Non-Banking Financial Companies (NBFCs) levy while processing or servicing your loan. These include:
- Processing fee -charged when your loan application is approved.
- Prepayment or foreclosure charges - applicable if you repay the loan early.
- Penalty charges - for late EMI payments.
- Loan insurance premium - if you opt for credit shield or protection cover.
Under the new GST 2.0 system, most financial services, including personal loan charges, continue to fall under the 18% tax slab. That means EMIs remain unaffected, but fees and service charges still attract 18% GST.
The only major relief for borrowers comes in the area of loan insurance, where GST exemption on life and health insurance could reduce costs. We’ll explain this in detail in the next section.
Key Areas Where Borrowers See an Impact
Even though personal loan EMIs are not taxed under GST, certain charges and add-ons still fall within the GST framework. With GST 2.0, borrowers should pay attention to these areas:
(a) Processing Fees
Lenders charge a processing fee (usually 1%–3% of the loan amount). This fee continues to attract 18% GST.
Example: Processing fee ₹5,000 → GST 18% = ₹900 → Total ₹5,900.
Effect of GST 2.0: No change - 18% on processing charges.
(b) Prepayment and Foreclosure Charges
If you repay your loan early, lenders levy prepayment/foreclosure charges. These also attract 18% GST.
Example: Foreclosure charge ₹10,000 → GST 18% = ₹1,800 → Total ₹11,800.
Effect of GST 2.0: No change -remains 18%.
(c) Loan Insurance Premiums - The Big Relief
Credit shield/loan protection insurance premiums earlier carried 18% GST. Under GST 2.0, life and health insurance are exempt, reducing the cost of loan-linked policies.
Example: Premium ₹10,000 → earlier GST ₹1,800 → now ₹0. Borrower pays only ₹10,000.
Effect of GST 2.0: Significant benefit if you opt for loan insurance.
(d) Indirect Economic Benefits
- Lower taxes on essentials/durables free up disposable income for EMIs.
- Banks may offer more competitive loan products in festive periods.
- Improved repayment capacity can support better approval rates.
Tax Benefits for Borrowers
While GST 2.0 did not reduce the tax on loan-related fees, borrowers still enjoy some direct and indirect benefits. Here is how:
- No GST on EMIs
The interest portion of your personal loan remains tax-free, so your monthly EMI stays unaffected.
- Loan Insurance Becomes Cheaper
With life and health insurance now exempt under GST 2.0, borrowers opting for loan protection insurance save up to 18% on premiums.
- Reduced Household Expenses
Essentials, healthcare products, and many daily-use items now fall under the 5% or tax-free slab, which lowers monthly spending and frees up income for EMIs.
- Better Affordability During Festive Season
Since GST cuts are designed to boost demand, banks and NBFCs may roll out festive loan offers with lower processing fees or bundled free insurance, enhancing affordability.
- Long-Term Savings
Even though charges like processing and prepayment penalties still attract 18% GST, the savings on insurance premiums and reduced cost of living indirectly reduce the overall financial burden of taking a personal loan.
Comparison Table: Old vs New GST Impact on Personal Loans
| Component |
Old GST (Pre-Sept 2025) |
New GST (GST 2.0) |
Effect on Borrower |
| Loan Interest (EMI) |
No GST |
No GST |
No change – EMIs remain tax-free |
| Processing Fees |
18% GST |
18% GST |
No change – still taxed at 18% |
| Foreclosure / Prepayment Charges |
18% GST |
18% GST |
No change – still taxed at 18% |
| Loan Insurance Premium |
18% GST |
Exempt |
Cheaper – borrowers save 18% on premiums |
6. Who Benefits the Most?
The GST 2.0 reforms may not directly reduce EMIs or processing fees, but certain borrowers gain significant advantages:
- Borrowers opting for loan insurance
With life and health insurance now GST-exempt, anyone taking a personal loan with protection coverage saves on premiums.
- Middle-class households planning festive purchases
Lower taxes on essentials and durables free up disposable income, making it easier to manage loan repayments.
- New borrowers seeking competitive loan offers
Banks and NBFCs may introduce festive offers with lower processing fees or bundled free insurance to attract borrowers.
- Households looking to optimize overall finances
Savings on insurance premiums and reduced household GST burden indirectly lower the cost of borrowing.
- High-value loan borrowers
Those taking larger loans with insurance coverage benefit more in absolute terms from the GST exemption on premiums.
Conclusion
GST 2.0 does not directly reduce taxes on personal loan processing fees or prepayment charges, so borrowers will still pay 18% GST on these components. However, the exemption of life and health insurance premiums under the new GST regime provides a significant cost-saving opportunity for borrowers who opt for loan protection policies.
In addition, the reduction of GST on daily essentials, healthcare products, and durables frees up more household income. This indirect benefit makes it easier for borrowers to manage monthly EMIs without straining their budget. Over time, these combined savings can make a personal loan more affordable and financially manageable.
Smart borrowers should actively compare different lenders and look for offers that include zero processing fees or bundled free insurance, especially during festive seasons when banks often introduce special promotions. By taking advantage of these opportunities, borrowers can maximize their savings under the new GST system and make more informed financial decisions.
Overall, while EMIs themselves remain unaffected, GST 2.0 provides indirect relief through reduced insurance costs and lower household expenses, making borrowing more convenient and cost-effective for those who plan carefully.
Frequently Asked Questions (FAQs) on Personal Loan Tax Benefits
1. Is EMI on personal loans taxable under GST?
No. The interest portion of personal loans, which forms your EMI, is considered a financial transaction and is not taxable under GST.
2. Does GST apply to personal loan processing fees?
Yes. Processing fees charged by banks or NBFCs continue to attract 18% GST even under GST 2.0.
3. Are prepayment or foreclosure charges on personal loans taxed?
Yes. Any prepayment or foreclosure charges remain under the 18% GST slab, so borrowers need to factor this in when repaying early.
4. How does GST 2.0 benefit loan insurance premiums?
Loan-linked life and health insurance premiums are now GST-exempt, making credit shield or protection policies cheaper for borrowers.
5. Can GST 2.0 indirectly reduce the overall cost of borrowing?
Yes. While EMIs remain tax-free, lower GST on essentials and durables frees up household income. Combined with cheaper loan insurance, this reduces the overall financial burden of taking a personal loan.