I have a bone to pick with – 1) cos who keep using the term “No-cost” EMI 2) Whoever decided to tax interest payments on credit card EMI’s

As somebody who pretends to understand lending firms for a living, I was under the assumption that nowhere in the world would people have to pay taxes on loan interest payments. I was proved wrong by a friend who has been making monthly payments + 18% GST on interest for his iPad bought using a credit card on a “No-cost” EMI plan.

Loan payments are usually not taxable because they are considered a repayment of borrowed money (rather than income or a sale of goods/services). This stands true for all loan categories in the world apart from credit card loans (in India) where apparently, they are not treated as a borrowing arrangement but a financial service. Even card fees and loan processing fees are not tax-exempt in India.

Every time you purchase something on a No-cost EMI plan, it’s not technically no-cost because you have to additionally pay:

X amount of LPF (Loan Processing Fee) + 18% tax on LPF + 18% tax on monthly interest payments

For example, if you buy an iPad worth 1 lakh rupees at 16% interest to be paid back in 12 installments, you will end up paying 1420 extra on interest tax + LPF. Now, it might not seem like and in most cases, still be worth availing the EMI given the opportunity cost of the capital but it’s still more money and its definitely NOT no-cost.

Btw, LPFs are an interesting innovation by banks to charge interest upfront. No rocket science here but it’s not just about recovering the “processing fee” – through charging a fee banks are able to realize revenue faster and it also acts an incentive for borrowers to commit to the loan payments. As an ancillary benefit, it also aids creditors in generating enough margin in case the borrower decides to refinance. Processing fees can vary between 0.5% to 3% depending on the region and the loan product. Ironically, Unsecured loans have usually high processing fee compared to home loans as % of loan amount.

In general, it’s important to watch out for any fees that’s charged over and above the interest. Creditors excluding the fees while quoting rates might make financing more attractive than they actually are. Spend wisely.