Where the tax applies on a business loan
In India, GST is charged on the fees a lender collects, not on the money you borrow or the interest you pay. BUSY's GST guide marks the principal and the loan interest as not taxable, and the processing fee, documentation charges and foreclosure or prepayment charges as taxable at 18%. Tata Capital's guide says the same for business loans: GST is levied on processing fees, pre-payment charges, foreclosure charges or any other charges paid to the lender.
That is why this calculator charges the tax rate only on the processing fee, on any other fixed fees and on a prepayment charge. The EMI and the interest are the same whatever tax rate you enter. The rate is an input, so you can change it for another country or set it to zero. 18% is the India GST rate used here as an illustration, not advice or a quote.
Worked example: ₹20 lakh at 12% for 60 months
Borrow ₹2,000,000 (₹20 lakh) at 12% a year over 60 months with a 2% processing fee. The EMI is ₹44,488.90 and the total interest is ₹669,333.72, so you repay ₹2,669,333.72 in EMIs. The processing fee is ₹40,000.00 and the 18% tax on it is ₹7,200.00, so you need ₹47,200.00 in cash at the start.
The total cost of borrowing, which is interest plus the fee plus the tax, is ₹716,533.72. If your business can reclaim the tax as input tax credit, the net cost is ₹709,333.72. Counting the fee and the tax as paid at the start, the APR is 13.87%, higher than the 12% quoted rate because of the fees and because interest is charged monthly.
In the first 12 months you pay ₹223,286.26 of interest and repay ₹310,580.49 of principal, leaving a balance of ₹1,689,419.51. The early EMIs are mostly interest, which is why prepaying early saves more.
Check against published examples
Tata Capital's guide takes a ₹20 lakh loan with a 2% processing fee: ₹40,000 of fee and ₹7,200 of GST at 18%. This calculator gives the same fee of ₹40,000.00 and tax of ₹7,200.00. The sum.money business loan EMI calculator shows the same loan at 12% over five years with an EMI of ₹44,489 and a total upfront cost of ₹47,200, which matches the EMI of ₹44,488.90 rounded to the rupee and the upfront cash of ₹47,200.00.
BUSY's calculator, which has no fee, shows an EMI of ₹34,665 for ₹10,00,000 at 15% over three years. Here that loan has an EMI of ₹34,665.33 and total interest of ₹247,951.83. Some calculators round the EMI to the rupee before multiplying by the number of months, so their total interest can differ from this one by a few rupees.
Tax that cannot be reclaimed, or no tax at all
Input tax credit is available to a GST-registered business only for loans used in the business, and not for every borrower. On ₹800,000 at 14.5% over 42 months with a 2.5% fee and ₹15,000 of other fees, the tax on the fees is ₹6,300.00 and the total cost is ₹266,119.21. If the tax is not reclaimable the net cost is the same ₹266,119.21.
Lenders in some countries charge no tax on loan fees. HMRC's VAT Notice 701/49 treats the granting of credit as exempt from VAT and administration or documentation fees tied to the loan as exempt too, and the CRA's GST/HST memorandum 17.2 lists loans and loan application work as exempt for deposit-taking financial institutions. Your offer is what counts, so check it. With the tax rate at zero, a ₹250,000 loan at 8.5% over 48 months with a 1.5% fee and ₹1,200 of other fees has a tax of ₹0.00, upfront cash of ₹4,950.00, a total cost of ₹50,729.64 and an APR of 9.98%.
Prepaying the loan
Enter a prepayment month and charge to see what settling early costs. After 24 of the 60 EMIs in the worked example the balance is ₹1,339,449.64. A 4% prepayment charge is ₹53,577.99 and the 18% tax on it is ₹9,644.04, so you need ₹1,402,671.66 in cash to close the loan.
Paying off after 24 months costs ₹517,605.15 in total: interest paid so far, the processing fee and its tax, and the prepayment charge and its tax. After reclaiming the tax the net cost is ₹500,761.12. You avoid ₹262,150.59 of interest compared with running to the end of the term.
What the APR includes
The APR is the yearly rate at which your EMIs are worth exactly the cash you keep after the fees and the tax on them. With no fees at all, the 12% rate on a default loan of ₹100,000 over 60 months gives an APR of 12.68%, because interest is added monthly. The processing fee and its tax push the same loan to 13.87%.
The APR counts the tax as paid at the start and ignores the day you receive any input tax credit, so it does not fall when you choose reclaimable. The net cost output shows the benefit of the credit.
What this estimate leaves out
This is a planning estimate for a fixed-rate, reducing-balance loan repaid in equal monthly EMIs. Lenders usually round the EMI to the rupee, so their figures can differ by a few rupees. It does not model a floating rate, a moratorium or pre-EMI interest, insurance, stamp duty, late-payment or penal charges, or the split of the tax into CGST, SGST or IGST. A processing fee that is deducted from the loan or paid separately is treated the same way, as cash you pay at the start. The income tax deduction for business loan interest is a separate matter for your accountant.
To solve the APR from a lender offer, use the business loan APR calculator.
To see only the interest cost, use the business loan interest calculator.
Inputs for the business loan EMI with GST calculator
Loan amount, interest rate and term
The amount borrowed, the nominal yearly rate on the reducing balance and the number of monthly EMIs.
Processing fee and other fixed fees
The processing fee is a percentage of the loan. Other fixed fees are documentation or similar charges. Both are paid at the start and both carry the tax.
Tax rate on fees
The GST or VAT rate the lender charges on its fees. It does not apply to interest or principal. Enter zero where lender fees are exempt.
Tax on fees is
Choose reclaimable if your business can claim the tax as input tax credit. The net cost output then leaves the tax out.
Prepayment month and charge
Optional. Repay the whole balance after this many EMIs. The charge is a percentage of the balance, and the tax rate is added to it.
CALCULATOR QUESTIONS
Business loan EMI calculator with GST questions
Is GST charged on the EMI of a business loan?
No. GST applies to the lender fees such as the processing fee, documentation and prepayment charges, not to the interest or the principal in the EMI.
How is GST on the processing fee calculated?
Multiply the fee by the tax rate. A 2% fee on ₹2,000,000 is ₹40,000.00 and 18% tax on it is ₹7,200.00.
Can a business claim input tax credit on the GST paid on a loan fee?
BUSY and Patron Accounting say a GST-registered business can claim credit on the tax paid on fees for a business loan. Confirm your own position with your accountant.
What is total upfront cash?
The processing fee, any other fixed fees and the tax on them, paid at the start. In the worked example it is ₹47,200.00.
Why is the APR higher than the interest rate?
The fee and its tax are cash you pay at the start and interest is added monthly. In the worked example 12% becomes 13.87%.
What tax rate should I use outside India?
Use the rate in your offer. Where lender fees are exempt, as lending is for most financial institutions in the UK and Canada, enter zero.