Most credit card holders are aware of the high interest rate of revolving credit, like in a credit card which can go up to 42% annually. Many people who can’t clear their dues in one credit cycle prefer converting the purchases into EMIs so that they can pay a much lower interest rate than that on the revolving credit on their spends. But do you know that your total cost in such an option could be 18% higher than the interest rate you think you will be paying.
The story is no different when you buy something using a no-cost-EMI option on your credit card thinking that you will not have to pay any additional cost. You may be in for a big surprise as this too comes with an additional cost that you may not be able to determine at the time of spending the money but will have to pay later on. Read on to know how this interest charge works and how you should deal with it.
Interest on credit card is liable for GST levy
Many kinds of services and fees charged by financial institutions fall under the ambit of the goods and services tax (GST), which is often borne by the consumer. Some services or charges may be exempted from GST, many are not. “The exemption notification only applies to transactions of providing loans, deposits or advances where the consideration is in the form of interest or discount. Thus, any fees or charges levied by banks, such as processing fee, late payment charges and statement issuance fee, will continue to attract GST,” says Siddharth Surana, Director of financial services consultant RSM India. This means the interest charged by credit cards will not be exempt from GST.
“As per the notifications issued by the central government, services by way of extending deposits, loans or advances in so far as the consideration is represented by way of interest or discount (other than interest involved in credit card services) has been exempted from GST,” says Surana.
In other words, the interest amount on non-credit-card lending is exempt from GST payment but the interest charged on credit cards attracts GST.
“This notification does not include interest involved in credit card services. Thus, there is a differential treatment of the interest component in credit card services. These are not exempt from GST and there is an 18% incidence of GST which applies over and above the interest component on credit card transactions,” says Surana.
This point was clarified recently when the Calcutta High Court took a view that the interest component on credit card EMI transactions are not covered by the exemption notification and so will attract GST.
The net additional cost that you pay due to GST will depend on the offered interest rate. For instance, if you are getting an EMI option at 20% p.a., your additional cost in terms of interest rate will be higher by 18% of 20% — which is 3.6%. So the effective interest cost, including GST, will be 23.6%.
The additional charge in this case does not go to the lender but to the government as it is a tax.
How you pay 18% more when you convert your credit card spend into EMI
| Particulars | What Borrower Pays (Rs) | What Lender Gets (Rs) |
| Product Price | 24,000 | 24,000 |
| Tenure | 12 months | 12 months |
| Offered Interest Rate | 20% | 20% |
| Total Principal Repayment | 24,000 | 24,000 |
| Total Interest Payment | 2,679 | 2,679 |
| Applicable GST Rate | 18% | 0 |
| Total Tax on Interest | 482 | 0 |
| Total Cost Of Finance | 3,161* | 2,679 |
| Higher Cost (%) | 18% | NA |
| Internal Rate of Return (IRR) | 23.60% | 20% |
*Interest + Tax
You pay this additional amount on no-cost-EMI purchases as well
If you think you won’t have to pay an additional cost if you take the no-cost-EMI option, you are wrong. The story is no different in this option.
Let us understand how this works.
In a no-cost-EMI option, the lender charges interest but the merchant gives you an instant discount on the entire interest amount charged by the lender for the full tenure of the loan. However, it does not include the GST amount that is levied on the interest component in your credit card statement. That is the additional cost you pay for no cost EMI through credit card.
When you go for no cost EMI through a credit card
| Particulars | What Borrower Pays (Rs) | What Lender Gets (Rs) |
| Product Price | 24,000 | 24,000 |
| Merchant Discount | 2,410 | 2,410 |
| Net Finance | 21,590 | 21,590 |
| Tenure | 12 months | 12 months |
| Offered Interest Rate | 20% | 20% |
| Total Principal Repayment | 21,590 | 21,590 |
| Total Interest Payment | 2,410 | 2,410 |
| Applicable GST Rate | 18% | 0 |
| Total Tax on Interest | 434 | 0 |
| Total Cost Of Finance | 2,844* | 2,410 |
| Difference in Cost (%) | 18% | NA |
| Internal Rate of Return (IRR) | 3.60% | 20% |
*Interest + Tax
What should you do?
Under these circumstances, you have to be careful while making a purchase using your credit card.
The first thing you need to do is to compare the cost of your financing option — which should include interest amount, GST amount, processing fee and other charges. Do not forget to add the GST on the interest rate charged by the credit card. For instance, if the credit card is offering an interest rate of 16% p.a., you need to add 2.88% p.a. (18% GST on 16%). So the final cost you will pay on interest will be 18.88% (16% + 2.88%). In case you are not using a credit card, there will be no need to take this GST component into consideration to figure out the cost of finance. Calculate the various options and weigh the cheapest option before deciding on the best way to make a purchase.
However, remember that the impact of GST does not make the credit card EMI a totally unviable option. It may still work for you on certain occasions. If the credit card option works out to be cheaper despite the GST impact, go for it. Many buy now pay later (BNPL) options usually come with a very high interest rate. Compared with this, you might get a much lower rate on your credit card, despite the GST component, if you have an excellent repayment record and your credit score is high.
