Is GST applicable on used car loans?

GST does not apply to the used car loan itself. But it does come into play around certain charges linked to the loan. This is where many borrowers get confused, because the tax shows up in bits and pieces rather than on the main amount you borrow.

In simple terms, GST is charged on the lender’s service fees. This usually includes the processing fee you pay at the start, documentation or handling charges and, in some cases, foreclosure or prepayment charges if you close the loan early. If you miss an EMI and a late payment fee is levied, GST is added to that fee as well. These charges are typically a small part of the total cost, but they do increase the final amount payable.

It is also important to understand where GST does not apply. The loan principal and the interest component fall outside GST. Your EMI, which is made up of principal and interest, remains GST-free throughout the tenure.

Before you sign the agreement, it is sensible to ask for a clear fee break-up. A quick look at that sheet usually removes any doubt about what is being taxed and why.