Handy TipsAn EMI discount will be applied to the customer’s purchase to cover the interest the bank charges. For example, if the bank’s interest is ₹100, an EMI discount of ₹100 will be applied to the order, thereby making the effective interest 0.The customer will be charged the GST on interest by the bank. This interest and GST will show up on the customer’s bank statement.
Example
Let us consider the example of a customer buying a mobile phone worth ₹15,000 on No Cost EMI on a 3-month EMI period. The bank charges 15% interest per annum. Additionally, the bank may charge the customer GST on the interest.Month | Outstanding loan at the start of the month | EMI | Interest | Loan Principal Paid | Outstanding principal at the end of the month | GST on Interest at 18% | EMI + GST
1 | 14632.67 | 5000 | 182.91 | 4817.09 | 9815.58 | 32.92 | 5032.92
2 | 9815.58 | 5000 | 122.69 | 4877.31 | 4938.27 | 22.09 | 5022.09
3 | 4938.27 | 5000 | 61.73 | 4938.27 | Nil | 11.11 | 5011.11
Total | | 15000 | 367.33 | 14632.67 | | 66.12 | 15066.12Customers Pay GST on InterestIn a no cost EMI, you provide a discount on the principal. The monthly installment paid by the customer consists of this principal and the interest. As the issuing banks still charge the interest, the customer will be charged the GST on interest by the bank.
Calculation of EMI
EMI is generally calculated using the below formula:EMI = [P x R x (1+R)ᴺ]/[(1+R)ᴺ⁻¹]
where
P = Principal
R = Interest rate per month
N = Number of installations of the EMI
For No Cost EMI, the EMI value is calculated as A/N, where A is the price of the product.
From the above example, EMI is ₹15000/3 = ₹5000
We will replace this value in the above equation to calculate the value of P.
5000 = [P x (0.15/12) x (1+(0.15/12))³]/[(1+(0.15/12))³⁻¹]
P comes out to be ₹14632.67, and the discount borne by you is ₹367.33. This is equal to 2.45% of the original amount.