The impact of GST on two-wheeler loan rates

Ever since the tax regime in India underwent reform with the inception of the GST in 2017, bike loan rates have undergone their share of change. Like every industry, the tax impact on the banking sector has been visible. So, if you are planning to finance your next motorcycle purchase through a two-wheeler loan, it pays to know how GST can impact your repayment.

Particularly, when you purchase your two-wheeler through a loan, you would be paying an EMI. Given that motorcycles happen to be one of the most economic and fuel-efficient vehicles out there on the road, thousands of people get them financed through loans. Now, let’s understand the tax impact in the current regime on your EMIs.

What is the effect of GST on two-wheeler loans?

Getting your two-wheeler loan financed through a bank or NBFC in India is easy. Creditors levy 18% GST on the services for sanctioning a two-wheeler loan. Moreover, each month you would be paying an instalment, and the interest on the motorcycle loan would be taxed at 18%.

Therefore, you need to consider the impact of GST on the prices of two-wheelers. The tax rate depends on the capacity of the engine of bikes and scooters. Even for electric bikes, the GST impact has led to an increment in prices. Even you need to pay 28% GST on the cost of spare parts under the current tax regime. Before you make your loan decision, it pays to factor in all these costs that would be transferred to your EMI.

What is the GST effect on two-wheeler prices

Let’s take a look at the GST effect on the prices of two-wheelers and their spare parts.

• If you settle for a bike with an engine capacity exceeding 350cc, the GST rate would be 31%.
• The tax rate would be 28% if you purchase a motorcycle with an engine capacity below 350 cc.
• Insuring your motorcycle or scooter would involve 18% GST.
• Spare parts like brake pads, gauge oil level, or clutch cable attract 28% GST.
• Owners need to pay 18% GST on lubricants, consumables, and changing batteries.

Previously, bike owners had to pay taxes at several stages. However, the GST effect has resulted in the consolidation of all these taxes into a comprehensive payment.

Now, you might get your purchase financed through a two-wheeler loan or a personal loan. In both these cases, you need to factor in the additional cost of GST on your EMIs. 

Charges on interest rates of two-wheeler loans

Have a look at the different charges that can impact your loan rates or overall repayment amount each month.

Processing fee: 

Most lenders, including banks and NBFCs charge a processing fee for disbursing your two-wheeler loan. This can be taxed at 18% as per the GST effect. So, if you are paying a processing fee of INR 1000, you need to pay INR 180 extra as GST. 

The processing fee is often calculated as a certain percentage of the loan amount. So, if you purchase an expensive motorcycle, be prepared to pay out a sizable GST on the processing fee, which should be higher.

Insurance premium: 

When you purchase your bike after obtaining a two-wheeler loan, you would secure your asset through an insurance policy. The premium you pay for insuring your two-wheeler would be taxed at 18%. Some buyers use a personal loan that helps them manage both the cost of the bike and the annual premium. 

In this case, you need to consider your loan requirements. Accordingly, you can calculate the GST on personal loan processing and interest that you pay every month. 

Pre-payment charges:

If you are financially secured and want to repay your loan before the term ends, you may have to pay a pre-payment charge. This can be around 3% to 5%, while GST may be applicable on the service charge.

What is the impact of GST on electric bike loans?

Although electric bikes have been a new entrant to the automotive industry in India, they have gained significant popularity. With petrol and diesel prices escalating rapidly, people are gradually inclining towards electric bikes. Another factor that has been driving the popularity of electric bikes is environmental awareness. 

So, it pays to understand the GST effect on the prices of electric bikes. Accordingly, you need to factor in the additional costs when you pay your EMI.

Currently, electric vehicles involve a GST of 5%. Since these vehicles are environment-friendly and are at the inception stage, the government has decided to impose a comparatively low GST rate. Naturally, a low GST would translate into lower loan interest rates and lower EMIs.

Electric bike owners would be happy to know that the GST on these vehicles has been reduced from 12% to 5%. Naturally, you would have lower loan requirements, and the corresponding GST on processing charges, interest, and service charges would be lower. 

Should you take a two-wheeler loan or a personal loan to get tax benefits?

Now, it’s time to compare the loan benefits and decide whether you should settle for a two-wheeler loan or a personal loan.

• In the first place, the loan interest rates would be lower if you go for a two-wheeler loan. Since these loans are secured, you would be paying a lower rate of interest.
• If you are obtaining a two-wheeler loan to purchase the motorcycle for business purposes, you can save tax when you file your IT.
• Now, if you want to finance your motorcycle through a two-wheeler loan, you need to pay around 20% down payment. If you want to finance it 100%, you should go for a personal loan. Since these are unsecured loans, the lender would check your loan eligibility and credit score before sanctioning one.

Take Away

Now that you have understood the impact of GST on two-wheeler loans, you can make your decision with clarity. Consider your loan repayment terms and the loan tenure, so that you remain at ease while working with your finances. 

If you approach one of the reputed banks or NBFCs, the financial institute would evaluate your profile and loan documents at the outset. However, if you are privileged to enjoy a pre-approved two-wheeler loan, it would be wise to go for it!