Understanding GST On Gold Loan Interest

The interest rate on the gold loan depends upon the type of loan scheme availed and its tenure. Read to know more about gst on gold loan interest!

26 Nov,2022 17:44 IST 48 Views
Understanding GST On Gold Loan Interest

Gold is usually an idle asset in Indian households and is seldom used for generating money. However, with gold being a safe-haven asset and its prices mostly rising during turbulent times, it can be used to fund short-term capital requirements.

A gold loan is the perfect solution to raise funds to meet short-term capital requirements. A loan against gold is a secured loan taken by pledging gold ornaments of 18-24 carats as collateral. The loan amount provided is a certain percentage of the gold, typically up to 75-80%, based on the current market value and the quality.

Like personal loans, lenders attach no end-use restrictions on gold loans, which means the loan can be used for just about any legitimate purpose. Also, interest rates on gold loans are lower compared with personal loans as gold is being submitted as collateral.

Interest Rates

Most banks and NBFCs offer gold loans but the rate of interest varies based on the credit profile of the applicant, value and purity of gold, and its prevailing prices. Also, a farmer keen on a gold loan for funding agriculture infrastructure or to meet other farming-related activities may get a rebate on the interest rate.

Numerous factors can affect gold loan interest rates in India. Some of them are influenced by personal factors relating to the borrower, while others are external relating to the current economic conditions and the domestic gold prices.

The interest rates on gold loan, availed by pledging gold, are relatively lower than other types of loans and range between 7.35% and 29% per annum currently and the repayment tenure ranges between seven days and 240 months.

Lenders follow two types of benchmarking methods to determine the loan against gold interest rate: Repo rate-linked lending rate and marginal cost of funds based, or MCLR-linked lending rate. The interest rate on a gold loan varies from one lender to another, depending on the chosen benchmarking method. Generally, MCLR-linked lending rates result in a gold loan at lower interest rate.

Goods and Services Tax

There is some confusion among people that a borrower needs to pay a GST on the interest component of the equated monthly instalment (EMI). To put things straight, no GST is levied on interest payments of the gold loan as there is no GST if the transaction fits the meaning of a loan or deposit.

The GST, however, is levied on all other charges such as processing fee, documentation charges, valuation fee, service charges and foreclosure charges, among others.

Also, if any penal interest is charged on the borrower due to a delay or a default in payment of instalments or delay in payment of original interest, a GST is charged at the rate of 18% of such amount.

Moreover, a borrower must take a loan against gold from a licensed lender. If the lender is not licensed, its loan products will not be deemed under the definition of “loans” and may attract GST, even on interest payments.

Conclusion

The interest rate on the gold loan depends upon the type of loan scheme availed and its tenure. Understanding the nitty-gritty of a gold loan and its various aspects is crucial because it directly affects the EMI.

A gold loan is a secured loan which customers can avail from banks as well as non-banking finance companies such as IIFL Finance in lieu of gold ornaments. IIFL Finance has a transparent fee structure and no hidden charges, so a borrower need not worry about the hidden costs incurred after applying for the gold loan.

At IIFL Finance, the interest rates on gold loans are at 9.96-27% per annum, and processing fee starts from zero rupee depending on the scheme. Also, the marked-to-market charges on IIFL Finance gold loans are the lowest in the industry at a flat Rs 500.

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