Is No Cost EMI really no cost?

CA Sarath R Krishnan | Last updated: 21 November 2020

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Quick Summary

No Cost EMI is heavily advertised by retailers, but the concept of zero interest is misleading. Retailers typically offer a discount equivalent to the interest amount, meaning the interest is baked into the EMI. Furthermore, GST at 18% is charged on this interest, which appears on your credit card statement. Therefore, 'No Cost EMI' isn't truly free; you end up paying the EMI plus GST on the interest.

Today, No cost EMI is one of the main attractions of online shopping sites and offline retailers. In certain online shopping sites there is also a separate section for No Cost EMI available products and in case of retailers also they spend very much on advertising No Cost EMI. As per RBI circular(RBI/2013-14/292) dated September 17, 2013 pernicious practices of banks includes No Cost EMI, they said that the concept of zero percent interest is non-existent. So the question arises “IS NO COST EMI IS REALLY NO COST”?

The most popular way through which online shopping sites offer ‘No Cost EMI’ is by offering discounts equivalent to the total amount of interest to be paid. Example: The price of phone you want to buy is Rs.9990/-. The phone is purchased under the scheme of 3 months No Cost EMI(3330*3) through credit card. Consider interest rate as 13%. In this scenario the bank calculates the interest amount through reverse method ie Interest + Principal = 9990/-. Principal portion is Rs.9777/- and interest is Rs.213/-. Monthly EMI we have to pay is Rs.3330/-(3330*3=9990).

The cardholder thinks that even if the interest is included in the total amount the EMI we have to pay is Rs.3330/- as agreed through online shopping sites and we don’t require to think about interest and other calculation included in the Credit Card. But every credit cardholder should be aware of the interest amount included in this EMI. GST on interest amount included in the credit card EMI is also charged to your card statement in addition to the EMI. If any doubts regarding this please check your monthly credit card statement you can see that GST @ 18% on interest is also charged in addition to the EMI.

No Cost EMI: Is It Really Free Unveiling the Truth

As per GST Notification No.12/2017 dated 28/06/2017 Heading No 9971 (27) Services by way of extending deposits, loans or advances in so far as the consideration is represented by way of interest or discount(other than interest involved in credit card services) is exempted. So it is clear that interest on credit card services is not exempted under GST and it is taxable @18%.

So we can say that the total amount is borne by the credit card holder in ‘No Cost EMI’ is normal EMI agreed through Online e retailers/ offline retailers plus GST @18% on interest amount included in the EMI.

The author Sarath R Krishnan is a Chartered Accountant Practicing in Pathanamthitta, Kerala

FAQ :

'No Cost EMI' is a marketing term used by retailers to attract customers, often implying zero interest charges on instalment payments.

Retailers usually offer a discount on the product's price that is equivalent to the total interest you would have paid on a standard EMI plan.

While the retailer might offer a discount to offset interest, the interest is still calculated by the bank and included in your EMI amount. You are essentially paying the principal plus interest, with the interest amount covered by an upfront discount.

Yes, GST at 18% is charged on the interest amount included in your EMI. This charge will appear on your credit card statement in addition to the EMI itself.

No, the RBI has stated that the concept of zero percent interest is non-existent and has identified 'No Cost EMI' as a pernicious practice.

The total amount borne by the customer is the normal EMI amount agreed upon with the retailer, plus 18% GST on the interest component included within that EMI.