YOUR MONEY: Know all about ex-gratia relief on interest during loan moratorium

By Raj Khosla

The waiver of compound interest on loans has aroused a lot of interest. Under this scheme, any loan of up to Rs 2 crore taken before February 29 this year will not be charged compound interest from March 1 to August 31. The loan will obviously entail an interest, but it will be only simple interest. There will be no “interest on interest”. The waiver scheme is meant to reimburse the compound interest charged during the period.

Any loan taken for home, auto, education, consumer durable, personal and MSME is eligible for the waiver. But the loan should have been taken from a recognised lending institution (bank, NBFC, housing finance company, credit card issuer). Loans from informal sources (relatives, friends, business associates and unregistered moneylenders) are not covered under the scheme. Also, loans against securities and fixed deposits, even if from a recognised institute, are not eligible for this ex-gratia relief.

Even credit card outstandings are eligible. The relief amount will be based on the rate charged by the bank for breaking outstandings down into EMIs. It will not be calculated based on the rate charged on revolving the credit card balances.

The moratorium is the main reason for the waiver. The intent is to offer relief to those who sought the moratorium by not charging them any interest on the interest they didn’t pay. Moratorium loans will be covered by the waiver.
Borrowers who didn’t opt for moratorium

They will also get the benefit. An ex-gratia payment will be credited to their loan accounts. Even if the loan has ended by now, the borrower will get pro-rata benefit for the period it was active between March 1 and August 31. However, bad borrowers will not get any benefit. If the loan became a non-performing asset before February 29, it will continue to accumulate compound interest without any waiver.

The ex-gratia payment will be credited to loan accounts by November 5. A borrower does not have to fill up any form or submit any proof. The lending institution will calculate the benefit due and credit it to the loan account. Any credit to a loan account brings down the outstanding amount and automatically reduces the loan tenure or EMI amount. But don’t expect a significant impact on the loan tenure.

The compound interest works out to a very small amount. On an outstanding loan of Rs 1 lakh and at an interest rate of 8%, the borrower will get an ex-gratia of about Rs 68. Costlier loans will fetch more. If the interest rate is 12%, the borrower will get about Rs 155 and if it is 14%, he will get about Rs 210.

Will ex-gratia payment be taxed?
Yes, this amount will be treated as income and taxed at the normal slab rate applicable to the individual. Since there is no TDS, the tax will have to be paid by the individual and the income mentioned in the tax return next year.
Banks, NBFCs and lending institutions will not be impacted by the waiver. The government will reimburse them the amount they credit to the accounts of borrowers. It is expected to be transferred to the lenders by December 15.

The writer is managing director, MyMoneyMantra.com