Are interest free EMIs on online sites like Amazon and Flipkart really interest free?

[arnprasad]

I need to google and do further research on this. Thought will ask here as well.

During online sales, particularly during major ones like Prime day or Dussehra week, we see interest free EMI credit card sales...In Amazon, on the payment page next to the credit card - it gives option of full payment or a list of EMIs..two months. 3 months..6 months...etc. Whenever it says interest free EMI, I look at this drop down options and choose the one that has the lowest total payment and feel happy that instead of paying lumpsum I am paying the same or similar amount over 6 months or whatever and frankly in none of these purchases have I ever reconciled the total payments made with lumpsum cost as I trusted the system.

Normally what happens is that Bank does charge 12-15% Interest but the same is given as an upfront discount...so I have done plenty of such purchases.

I am a CA and should know better....but other day I was having a chat with my fellow CA nephew and he said there is a hidden charge which most people are not aware. While the interest charged by the bank is disclosed upfront and given as a discount as mentioned above, he said that GST that is charged...I guess its charged on interest - that part is not disclosed.

So if one would actuall add up his total payments over the instalment period and compare it with the lumpsum single payment - one tends to pay more because of GST.

I have not tested this and will test it this week. Just wanted to check if any of you have heard/checked something similar and whether this interest free EMI is some kind of a scam where we end up paying more than promised.

 

[jaiwant_alex]

It's not interest free. But it's not a scam either. However a customer who is aware should not take the option of finance schemes as the only benefit is the ability to pay over time instead of lump sum. If a customer has available funds, it's better to push for a discount.

An over simplified illustration:

In a sale without finance, a seller would offer a discount of Rs.20 on the price of Rs. 100 and sell it for Rs 80.

With a financier stepping in , the seller offers the product to the customer at Rs. 100 to be paid over x months but receives Rs. 80 from the financer.

Seller still forgoes the Rs 20 which he was willing to give as discount. Financer retains the Rs. 20 as interest. Customer pays the undiscounted price but gets the convenience of not paying upfront.

 

[all4music]

I recently purchased a laptop from HP India online store. I usually never buy stuff online on EMI. Weirdly, the offer on card was Flat INR 2500/- off only on EMI transactions.

HP clearly mentioned that I'll be charged Interest but that amount will also be included as additional discount apart from flat 2500/-. I guess this was done due to Govt rule against real 0% finance that was prevalent earlier.

As I check my card statement, there are 2 additional charges - one time fee of INR 200/- as processing fee and 18% GST on the Interest charged [not on the EMI].

When I total it all up, I still saved good INR 2000+ . So in short, yes GST on interest is applied and but it is not sizeable amount when compared to total value.

 

[arnprasad]

It's not interest free. But it's not a scam either. However a customer who is aware should not take the option of finance schemes as the only benefit is the ability to pay over time instead of lump sum. If a customer has available funds, it's better to push for a discount.

An over simplified illustration:

In a sale without finance, a seller would offer a discount of Rs.20 on the price of Rs. 100 and sell it for Rs 80.

With a financier stepping in , the seller offers the product to the customer at Rs. 100 to be paid over x months but receives Rs. 80 from the financer.

Seller still forgoes the Rs 20 which he was willing to give as discount. Financer retains the Rs. 20 as interest. Customer pays the undiscounted price but gets the convenience of not paying upfront.

During sales as I have mentioned..normally the prices are the lowest. Example you are giving does not relate to online sales . Still thanks for taking time to respond

 

[arnprasad]

I recently purchased a laptop from HP India online store. I usually never buy stuff online on EMI. Weirdly, the offer on card was Flat INR 2500/- off only on EMI transactions.

HP clearly mentioned that I'll be charged Interest but that amount will also be included as additional discount apart from flat 2500/-. I guess this was done due to Govt rule against real 0% finance that was prevalent earlier.

As I check my card statement, there are 2 additional charges - one time fee of INR 200/- as processing fee and 18% GST on the Interest charged [not on the EMI].

When I total it all up, I still saved good INR 2000+ . So in short, yes GST on interest is applied and but it is not sizeable amount when compared to total value.

True. what you did was corroborate what I mentioned as well.

So for folks who think too deep on finance need to evaluate if the GST paid on interest is less than the interest we would have earned by not paying the lumpsum so that we are net positive.

Guess for items costing less than say 25K..may not be worth the evaluation. But if we buy say a one lakh item..then worth doing the calculations I think.

 

[jaiwant_alex]

During sales as I have mentioned..normally the prices are the lowest. Example you are giving does not relate to online sales . Still thanks for taking time to respond

The principle remains the same whether it's an online seller , or whether it's during a sale or otherwise. As long as the seller is willing to sell at a discount, the opportunity will exist for a financer to be roped in. As buyers we are not aware of how deep these discounts are.
For online sellers , the discounts are very deep because they have the financial backing. This is reflected in the profitability of these businesses. Going by public data/news the top two online sellers are making net loss of approx Rs.5k cr each

 

[arnprasad]

The principle remains the same whether it's an online seller , or whether it's during a sale or otherwise. As long as the seller is willing to sell at a discount, the opportunity will exist for a financer to be roped in. As buyers we are not aware of how deep these discounts are.
For online sellers , the discounts are very deep because they have the financial backing. This is reflected in the profitability of these businesses. Going by public data/news the top two online sellers are making net loss of approx Rs.5k cr

Just to clarify again...as my question was regarding specific case of people trusting no cost EMI where there is a cost involved that most of us may not be aware of.

It was not about whether online sellers are making profit or not or whether someone else is offering it cheaper if we pay upfront.

Hope you appreciate. Also I am a Chartered Accountant with 25 years of experience and I understand how discounting works and why banks/retailers offer discounts, why Amazon is making losses....etc.

Since you replied twice...lets take an example where a phone with MRP of 50,000 is usually sold at say 44,999 on Amazon. Same phone at offline retailers are also sold at 44,999. So offline is not offering any discount for paying upfront.

Now during sales, between the retailers and the bank (retailers are willing to take a hit because they want to bump up sales and also hope we will buy other items on the site which have higher margins like say accessories for the phone. banks are willing to take a hit since they want to promote their credit cards eventually hoping that we buy more items on the credit card and they make money on it) - the same phone is offered at 40,000 if we use a specific credit card. During such sales rarely are offline stores selling at same price since they cannot match online.

So for this 40,000 - they say you either pay 40,000 upfront or say they offer it for 10,000 in four months. So there is no question of lumpsum guys getting a lesser price. Now a smart guy who understands finance will choose the no cost EMI offer since he will gain interest on the amount which he has not paid upfront.

Still - thanks for taking time out for replying twice. I hope my question wasn't confusing nor is this rejoinder.

I was just trying to make people aware that the so called no cost EMI actually has some cost attached which is not visible upfront which is the GST part on the interest.

Hope it helps.

 

[Nitin K]

In business I guess, there is no such thing as a free lunch. GST hurts you hard especially when the white goods are more on the expensive side . Generally the end consumer cannot take any benefit of gst.
Better to pay upfront at discounted price if possible.