Impact of GST on Car Loans

21 May, 2025


Synopsis

• GST mainly impacts Car Loans indirectly based on how it affects the cost of Car Loans.
  

• Almost all cars regardless of model, make, design incur a GST rate of 28%.
  

• The electric cars and hydrogen fuel cell vehicles incur 5% and 12% GST respectively. The other car categories incur varying compensating cess ranging from 1% to 15%.
  
  

The tax reforms witnessed a significant change since the introduction of the Goods and Services Tax (GST) in 2017. Divided into four segments, GST includes four main types of rate slabs: 5%. 12%, 18%, and 28%. The product and service categories fall under these four rates based on their necessities. Vehicles, including cars, typically attract a GST of 28%. As the rate of buying cars is impacted, so is the borrowing cost for Car Loans. Read on to learn more about the impact of GST on Car Loans.

Impact of GST on Car Loan Based on the Vehicle Categories

The type of car you buy determines the Car Loan amount, which ultimately impacts the GST on Car Loans. Hence, it is important to understand GST rates based on automobile types. All vehicle categories, from small cars to high-end luxury cars, as per the Union Budget 2024, attract a GST rate of 28%. The only exceptions are electric cars and hydrogen fuel cell vehicles. The former incurs a 5% GST while the latter a rate of 12%. However, the cess percentage varies for different car categories.

Once you understand these GST rates and compensation cess rates, you can understand the total amount you need to borrow for your car and how it impacts the EMI, which in turn, impacts the GST payable on the EMI payments.

Note, there is no direct impact of GST on Car Loan interest, the GST plays a role on Car Loans mostly based on the cost of the vehicle.

Impact of GST on Car Loans

As discussed, GST does not impact Car Loans directly, i.e., the interest component or the overall EMI amount is not impacted. However, a GST rate of 18% applies to the following components of Car Loan:

• Processing Fees
  
  The charge you incur for processing your Car Loan is considered a service charge and incurs a GST rate of 18%. The loan processing fee typically ranges between 0.5% to 2% of the loan amount. So, if the processing fee on your loan amount of ₹5 lakhs is 1% (5,000). The GST rate of 18% (900) will be charged. This makes the total fee ₹5,900.
  
  

• Foreclosure or Prepayment Fees
  
  You can foreclose your loan quicker than the loan repayment tenure if your finances allow. However, doing so attracts prepayment penalties. GST rate on Car Loans in this case would slightly increase your cost. For example, if the foreclosure penalty is ₹5,000, the GST rate would amount to ₹900. This makes the total prepayment charge ₹5,900.
  
  

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Tips to Minimise the GST Impact on Car Loans

You can reduce the strain of GST on Car Loans by working towards reducing the prepayment and processing fees. Here are some tips that can help:

• Compare the processing fees of different lenders and choose the one with lower fees to reduce the GST burden.
  
  

• Leverage the information available on lenders' websites to gain clarity on the charges. Also, check with customer support to get more information before settling on a Car Loan provider.
  
  

• Plan your prepayments carefully by calculating the total cost, including GST before making the prepayment.
  
  

• Negotiate with lenders to lower the charges based on your good credit score or stable financial standing. This will indirectly reduce the GST liability.
  
  

Tax Benefits on Car Loans

• When you finance a car for personal use, you cannot claim tax deductions as it is considered a luxury product. However, if you are buying a car for commercial use, you can claim a tax deduction on the interest paid.
  
  

• You can list the interest paid as a business expense and claim this deduction. This means the interest amount you pay on Car loan gets deducted from your taxable income. All you need is an interest certificate from the lender and a legitimate document proving the car is used for a commercial purpose.
  
  

• Another way to claim tax deductions is through depreciation. A car is considered a depreciating asset, and you can claim up to 15% depreciation on it every year. This reduces your tax liability considerably.
  
  

Get Attractive Rates with HDFC Bank Xpress Car Loans

GST has an undeniable impact on the total cost of financing your car. It is essential to look into this component while deciding on a car model as well as comparing Car Loan offers. You want to look into car models with lower compensating cess and choose Car Loans with minimal charges. So, take your time with the research before you apply for the loan. For a Car Loan option with reasonable rates and convenience maximised, consider HDFC Bank Xpress Car Loan. Get all the details you need on the portal and apply today!

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*Disclaimer: Terms and conditions apply. The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. Credit at sole discretion of HDFC Bank Ltd. Other charges and taxes as applicable. The offer is unconditionally cancelable without prior notice. Interest rates are subject to change. Please check with your RM or closest bank branch for current interest rates.