Is no-cost EMI really free?

Not quite. On a no-cost EMI the seller discounts the price by the interest, so the interest itself is covered, but 18% GST on that interest and any processing fee are not. On a ₹60,000 purchase over six months at an example rate of 15%, the interest is ₹2,652 and the GST on it ₹477, before any fee.

How a no-cost EMI works

The lender still charges interest. What makes it “no-cost” is that the seller gives a discount, upfront or as a cashback, of about the same size as that interest, so the EMIs add up to roughly the price on the tag.

Interest is the lender’s charge for a service, and GST at 18% applies to it. The discount covers the interest; it does not cover the tax on the interest, which appears separately, usually on the card statement for each EMI. Many lenders also charge a one-time processing fee for converting a purchase to EMIs, with GST on that fee as well.

Extra cost = 18% GST on the interest + processing fee + 18% GST on the fee

The GST, worked

A ₹60,000 loan over six months at an example rate of 15% has an EMI of ₹10,442 and interest of ₹2,652 over the term. A no-cost scheme offsets that ₹2,652 with a discount; the 18% GST on it, ₹477, is still paid.

The longer the term and the larger the amount, the larger the interest and so the GST. Over nine months at an example 16% on the same ₹60,000, the interest is ₹4,071 and the GST ₹733. On ₹1,00,000 over twelve months at 15%, the interest is ₹8,312 and the GST ₹1,496. The rates here are example inputs, not any lender’s.

Other costs that can come with it

A processing fee, where charged, is usually a fixed amount for each purchase converted, plus 18% GST. On the ₹60,000 example, an example fee of ₹199 becomes ₹235 with GST, so the total over the price is about ₹712.

Some sellers offer a lower price for paying in full. If the no-cost EMI is offered against the full price instead, the discount you give up is part of the cost too. Paying off early can bring a foreclosure charge, and a missed EMI is charged at the card’s ordinary interest rate and is reported to credit bureaus.

The whole purchase amount is blocked on a credit card’s limit when it is converted, and is released as each EMI is paid.

The one figure that compares the options

Add up everything that will leave your account: the EMIs, the GST on interest, the processing fee and its GST. Set that against the price you would pay in full today, after any discount for paying upfront. The gap between the two is what the EMI costs. The EMI calculator below gives the interest for any amount, rate and term you enter.