Yes, that’s possible and it is all mathematics. In this post, let’s understand how this can happen. Before we go there, let’s do a quick recap of how No-cost EMIs work.

## How No-Cost EMIs Work

- You purchase an item worth Rs X. You opt for the No-cost EMI option (let’s say 6 months) on the payments page.
- You get an upfront discount of Rs Y from the merchant such that the loan of (X-Y) results in an EMI of X/6 at the prevailing rate of interest. Usually, the brand or the merchant bears the cost of the discount.

Let’s understand this with an example. You make a purchase of Rs 25,000 and opt for 6-month No-cost EMI on the payments page. You get an upfront discount of Rs 921.2 (assuming 13% p.a. interest) and your credit is charged Rs 24,078. After a few days, your bank automatically converts the amount into an EMI based loan. And the EMI is Rs 4,166.7 (25,000/6) for 6 months. You pay Rs 25,000 over 6 months.

## Understanding the Impact of GST

Well, you do pay a bit extra. You will pay a little more than Rs 25,000 over the next 6 months. How? Because GST is applicable on the interest portion of the EMI.

Month | Outstanding Amount | EMI | Principal Repaid | Interest paid | GST | Total EMI |

1 | ₹ 24,079 | ₹ 4,167 | ₹ 3,906 | ₹ 261 | ₹ 47 | ₹ 4,214 |

2 | ₹ 20,173 | ₹ 4,167 | ₹ 3,948 | ₹ 219 | ₹ 39 | ₹ 4,206 |

3 | ₹ 16,225 | ₹ 4,167 | ₹ 3,991 | ₹ 176 | ₹ 32 | ₹ 4,198 |

4 | ₹ 12,234 | ₹ 4,167 | ₹ 4,034 | ₹ 133 | ₹ 24 | ₹ 4,191 |

5 | ₹ 8,200 | ₹ 4,167 | ₹ 4,078 | ₹ 89 | ₹ 16 | ₹ 4,183 |

6 | ₹ 4,122 | ₹ 4,167 | ₹ 4,122 | ₹ 45 | ₹ 8 | ₹ 4,175 |

Now, this GST payment is extra. Over 6 months, you pay GST of Rs 166 extra. Hence, total payment of Rs 25,166 and not Rs 25,000. If you consider this as IRR (loan of 25,000 and the 6 EMIs as mentioned above), the GST component increases the cost from 0% to 2.27% p.a. So, really not a problem.

**Provided the loan tenure is 6 months and loan interest rate is 13% p.a., the GST component will increase the cost from 0% to 2.27% p.a., irrespective of the purchase amount.**

## Don’t Ignore the Processing Fee and Ancillary Charges

Clearly, GST alone does make this expensive. Then, how can the No-cost EMI become expensive? Enter the processing fee or other ancillary charges. Let’s say, for each No-cost EMI, you have to pay a fee of Rs 199 (excluding GST).

Month | Outstanding Amount | EMI | Principal Repaid | Interest paid | GST | Processing fee (incl. GST) | Total EMI |

1 | ₹24,010 | ₹4,167 | ₹3,887 | ₹280 | ₹50 | ₹235 | ₹4,452 |

2 | ₹20,124 | ₹4,167 | ₹3,932 | ₹235 | ₹42 | – | ₹4,209 |

3 | ₹16,192 | ₹4,167 | ₹3,978 | ₹189 | ₹34 | – | ₹4,201 |

4 | ₹12,214 | ₹4,167 | ₹4,024 | ₹142 | ₹26 | – | ₹4,192 |

5 | ₹8,190 | ₹4,167 | ₹4,071 | ₹96 | ₹17 | – | ₹4,184 |

6 | ₹4,119 | ₹4,167 | ₹4,119 | ₹48 | ₹9 | – | ₹4,175 |

The processing fee increases the cost of No-cost EMI scheme (Rs 25,000 and the 6 EMIs) from the 2.27% p.a. (due to GST alone) to 5.52% p.a.

Here, the quantum of purchase amount plays a role. For a smaller purchase amount, the increase in effective cost will be higher. Because the processing is irrespective of the loan amount.

- For the purchase amount of Rs 10,000, the effective cost of No-cost EMI goes up to 10.44% p.a.
- For the purchase amount of Rs 50,000, the effective cost goes up to only Rs 3.89% p.a.

I have taken the processing fee as just an example. The fee/charge could come with a different nomenclature but cost is cost. Before signing up, you must be very clear about any ancillary charges.

## Sometimes You Get Cashback on Full Payments

Let’s say you own an **ICICI Amazon Pay Credit card**. You want to buy a phone worth Rs 25,000. You have two options.

- You pay upfront. You get 5% cashback (for prime members). Net cost = Rs 25,000 – 5%*25,000 (cashback)= Rs 23,750
- You buy on No-cost EMI. As per terms and conditions of the card, cashback is not available on EMI transactions.

Hence, to get a sense of the true effective cost of No-cost EMI, we consider a loan amount of Rs 23,750 and the six EMI (total of 25,178 over 6 months). The cost shoots up to 20.37% p.a.

**If we include the impact of processing fee, the cost jumps to 23.65% p.a. Now, that’s an expensive loan.**

By the way, you will have a similar issue with the **Flipkart Axis Bank card** too.

## How Does All This Matter?

It matters because unless you understand the true cost of purchase mode, you won’t be able to make the right choice. Let me give you a few options.

- Pay upfront (no cashback)
- Pay upfront (5% discount/cashback)
- Take a loan from ABC bank at 13% p.a. for 6 months
- Take a loan from FGH bank at 13% p.a. for 6 months. Upfront 5% discount.
- No-cost EMI from LMN bank for 6 months
- No-cost EMI from XYZ bank for 6 months (Processing fee of Rs 199)

It is possible that a regular loan might turn out to be more cost efficient than a No-cost EMI loan.

**Option 3 (**Take a loan from ABC bank at 13% p.a. for 6 months)

Month | Outstanding Amount | EMI | Principal Repaid | Interest paid | GST | Processing fee (incl GST) | Total EMI |

1 | ₹25,000 | ₹4,326 | ₹4,055 | ₹271 | ₹49 | – | ₹4,375 |

2 | ₹20,945 | ₹4,326 | ₹4,099 | ₹227 | ₹41 | – | ₹4,367 |

3 | ₹16,846 | ₹4,326 | ₹4,144 | ₹182 | ₹33 | – | ₹4,359 |

4 | ₹12,702 | ₹4,326 | ₹4,188 | ₹138 | ₹25 | – | ₹4,351 |

5 | ₹8,514 | ₹4,326 | ₹4,234 | ₹92 | ₹17 | – | ₹4,343 |

6 | ₹4,280 | ₹4,326 | ₹4,280 | ₹46 | ₹8 | – | ₹4,334 |

Total | ₹26,129 |

**Option 4 (**Take a loan from FGH bank at 13% p.a. for 6 months. Upfront 5% discount)

Month | Outstanding Amount | EMI | Principal Repaid | Interest paid | GST | Processing fee (incl. GST) | Total EMI |

1 | ₹23,750 | ₹4,110 | ₹3,852 | ₹257 | ₹46 | – | ₹4,156 |

2 | ₹19,898 | ₹4,110 | ₹3,894 | ₹216 | ₹39 | – | ₹4,149 |

3 | ₹16,003 | ₹4,110 | ₹3,936 | ₹173 | ₹31 | – | ₹4,141 |

4 | ₹12,067 | ₹4,110 | ₹3,979 | ₹131 | ₹24 | – | ₹4,133 |

5 | ₹8,088 | ₹4,110 | ₹4,022 | ₹88 | ₹16 | – | ₹4,126 |

6 | ₹4,066 | ₹4,110 | ₹4,066 | ₹44 | ₹8 | – | ₹4,118 |

Total | ₹24,822 |

**Option 5 (**No-cost EMI from LMN bank for 6 months)

Month | Outstanding Amount | EMI | Principal Repaid | Interest paid | GST | Processing fee (incl GST) | Total EMI |

1 | ₹24,079 | ₹4,167 | ₹3,906 | ₹261 | ₹47 | – | ₹4,214 |

2 | ₹20,173 | ₹4,167 | ₹3,948 | ₹219 | ₹39 | – | ₹4,206 |

3 | ₹16,225 | ₹4,167 | ₹3,991 | ₹176 | ₹32 | – | ₹4,198 |

4 | ₹12,234 | ₹4,167 | ₹4,034 | ₹133 | ₹24 | – | ₹4,191 |

5 | ₹8,200 | ₹4,167 | ₹4,078 | ₹89 | ₹16 | – | ₹4,183 |

6 | ₹4,122 | ₹4,167 | ₹4,122 | ₹45 | ₹8 | – | ₹4,175 |

Total | ₹25,166 |

**Option 6 **No-cost EMI from XYZ bank for 6 months (Processing fee of Rs 199)

Month | Outstanding Amount | EMI | Principal Repaid | Interest paid | GST | Processing fee (incl GST) | Total EMI |

1 | ₹24,079 | ₹4,167 | ₹3,906 | ₹261 | ₹47 | 235 | ₹4,448 |

2 | ₹20,173 | ₹4,167 | ₹3,948 | ₹219 | ₹39 | – | ₹4,206 |

3 | ₹16,225 | ₹4,167 | ₹3,991 | ₹176 | ₹32 | – | ₹4,198 |

4 | ₹12,234 | ₹4,167 | ₹4,034 | ₹133 | ₹24 | – | ₹4,191 |

5 | ₹8,200 | ₹4,167 | ₹4,078 | ₹89 | ₹16 | – | ₹4,183 |

6 | ₹4,122 | ₹4,167 | ₹4,122 | ₹45 | ₹8 | – | ₹4,175 |

Total | ₹25,401 |

**And w****e can see, option 4 turned out to be the best. You paid the least in this option. **The upfront discount tilted the balance in its favour.

By the way, you could pay upfront (take 5% discount/cashback) and later ask your bank to convert this purchase into an EMI. I suggest you try out the effective cost.

Have the No-cost EMI schemes suddenly become bad? No, the schemes haven’t. Whether you opt for an outright purchase or a loan is also a function of your cashflows. With No-cost EMI, you can spread out the cash outflow over a few months, which is good. However, do look out for any non-interest charges. Such charges will increase the effective cost. Moreover, look out for any discount on full payments or on regular EMI payments. Unless your cashflows are a problem, this will likely be the best option.