Is no cost EMI really free? What you actually pay

"No cost EMI" sounds like a free loan: split the price into equal monthly payments that add up to exactly what the product costs. The interest part really is covered, by the merchant or brand. But almost every no cost EMI still costs you something. Usually it's a small amount, sometimes it's more than you'd expect, and once in a while it's more than a regular payment would have cost.

The short answer: no cost EMI is usually cheap, but rarely free. Here's what you actually pay, and how to tell when it's worth it.

How no cost EMI works

When you pick a no cost EMI at checkout, your card's bank turns the purchase into a short loan at its normal EMI interest rate. To keep your total equal to the price, the merchant gives an upfront discount equal to the interest the bank will charge. You then repay the bank in equal EMIs of price ÷ months.

So the interest is real. It's charged by the bank and paid for you through the discount. That detail matters, because the costs below are tied to that interest and to the EMI conversion itself.

What you actually pay

1. GST on the interest

Interest on an ordinary loan is exempt from GST, but the exemption (Sl. No. 27(a) of Notification No. 12/2017-Central Tax (Rate)) leaves out "interest involved in credit card services". So the bank charges GST on the interest inside every EMI, and the merchant's discount doesn't cover it. It shows up on your statement each month, largest in the first month.

2. The processing fee, plus GST

Your bank may charge a one-time fee to convert a purchase into EMIs; the EMI offer or your card terms will say. GST applies to that fee as well: a fee isn't interest, so it isn't exempt (CBIC Circular No. 102/21/2019-GST). On a small purchase, this fee is often the biggest part of the cost.

3. Any discount you give up

Sometimes paying the full amount upfront gets you an instant discount or cashback that the EMI option doesn't. If so, that lost discount is part of what the EMI costs you, even though it never appears on a statement.

4. What happens if plans change

Closing the EMI early, cancelling it, or returning the product can each have their own rules: a foreclosure charge, the bank reversing the discount, or the fee not being refunded. These depend on your bank and the merchant, so read the EMI terms before you agree.

GST on financial services is 18%: 9% central tax under Notification No. 11/2017-Central Tax (Rate) (heading 9971) plus 9% state tax. Our calculators use 18% by default; your card statement shows the GST your bank charged.

Example: a ₹60,000 phone over 6 months

Assumptions, for illustration: the bank's EMI interest rate is 15% a year and the processing fee is ₹199.

• Your EMI is ₹10,000 a month.
• The interest built into those EMIs is ₹2,540, paid by the merchant as a discount.
• GST on that interest: ₹457 over the plan, starting at ₹129 in month 1.
• Processing fee ₹199 plus ₹36 of GST: ₹235.

Extra cost to you: ₹692, so you pay ₹60,692 for a ₹60,000 phone. As a yearly rate on the money you effectively borrowed, that's about 4.0%.

Compare that with a standard card EMI on the same phone, where you pay the interest yourself:

Against a standard EMI, the no cost version saves you ₹2,672. Against paying in full with no other offers, it costs ₹692 more.

When the fee is most of the cost

A flat processing fee weighs much more on a small purchase. Take a ₹12,000 purchase over 3 months on the same terms:

• Interest covered by the merchant: ₹294
• GST on that interest: ₹53
• Processing fee + GST: ₹235

The extra cost is ₹288, and 82% of it is the fee. As a yearly rate, that's about 14.6%, on a plan advertised as no cost. For small purchases, check the fee before choosing EMI.

The discount you give up

Say paying the full price today would get you an instant discount of ₹3,000 on the phone, but the no cost EMI option doesn't. Then the no cost EMI really costs you the ₹692 above plus the ₹3,000 you gave up: ₹3,692 in all.

That makes it a question of whether spreading the payment over 6 months is worth that much to you. Sometimes it is, if the alternative is breaking a fixed deposit or running short of cash. But it's a choice, not a free benefit.

Compare prices for the same product, from the same seller, with and without the EMI option. If the EMI price is higher, or a payment-specific offer only applies to full payment, count the difference as part of the EMI's cost.

Other things to check before you choose

• Your credit limit. An EMI blocks part of your card limit until it's repaid, which can leave you short for other spending. Check how much is blocked and how it's released as you pay.
• Missed payments. The EMI is part of your card bill. If you don't pay the bill in full and on time, late fees and interest on unpaid card dues can quickly cost far more than the EMI saved.
• Early closure and cancellation. Look up your bank's foreclosure charge for card EMIs, and what happens to the merchant discount if you close early or return the product.
• Whether you'd pay in full anyway. If you'd clear the full amount on your next statement regardless, the card's interest-free period may already give you time to pay, without a fee or GST. Check your card's terms on when that applies.

So, is no cost EMI worth it?

It usually makes sense when:

• the processing fee is low or zero, so the extra cost is mainly a small amount of GST;
• the purchase is large enough that a flat fee is a small share of it;
• paying in full doesn't get you a better price; and
• you're confident you'll pay your card bill in full every month.

Think twice when the fee is large relative to the purchase, when paying in full comes with a discount, or when the EMI would block too much of your credit limit.

Work out your own

Enter the price, tenure, your bank's EMI interest rate and processing fee in the no cost EMI & credit card EMI calculator. It shows the merchant discount, GST on interest, the fee with GST, your total extra cost and the effective yearly rate, and lets you switch to a standard EMI to compare.

For the month-by-month GST calculation, read How GST on credit card EMI is calculated. If you're thinking of a personal loan instead, see Credit card EMI vs personal loan.