Income Tax on Gratuity: Is Gratuity Taxable, Exemption Limits & Calculation

This article explains the gratuity exemption limit under Indian income tax law, who qualifies for full or partial exemption, and the exact formulas used to calculate gratuity tax for government employees, private employees and those not covered under the Gratuity Act. 

Gratuity is taxable only beyond a ₹20 lakh limit. Under Section 10(10) of the Income Tax Act, 1961, this is the gratuity tax exemption limit available to private-sector employees covered under the Payment of Gratuity Act, 1972. Government employees get a full tax exemption on gratuity, no matter the amount. This guide breaks down the current gratuity exemption limit, who qualifies, the governing law and the exact formula used to work out tax on gratuity, so you know precisely what you owe and what you keep. 

QUICK STAT 

The gratuity tax exemption limit was raised from ₹10 lakhs to ₹20 lakhs to reflect rising salary levels among Indian employees.  (Source: Payment of Gratuity Act, 1972 (as amended)) 

What is Gratuity? Meaning and Eligibility 

Gratuity is a lumpsum benefit your employer pays you over and above your regular salary, as a reward for long, continuous service. The Payment of Gratuity Act, 1972 governs this benefit for any establishment with 10 or more employees, and it kicks in once you complete 5 continuous years with that employer. 

There’s one important exception worth flagging early: if an employee dies or becomes disabled due to an accident or disease, the 5-year condition is waived entirely. The gratuity becomes payable immediately, regardless of tenure. 

You become eligible to receive gratuity in 3 situations: 

  1. Superannuation, meaning you’ve reached the retirement age set by your employer 
  1. Retirement or resignation, after completing 5 years of continuous service 
  1. Death or disablement of the employee, with no minimum service requirement 

Tax Liability on Gratuity 

Here’s the part most people get wrong: gratuity isn’t automatically tax-free just because it’s a retirement benefit. Under the Income Tax Act, 1961, gratuity becomes taxable once it crosses a specific threshold, and that threshold depends on which category of employee you fall under. 

The exemption limit itself has changed over the years. It stood at ₹10 lakhs for a long stretch, and the government later revised it upward to ₹20 lakhs, recognising that rising salaries meant the old cap was taxing ordinary retirement payouts. 

Aspect Details 
Governing Section Section 10(10), Income Tax Act, 1961 
Current Exemption Limit ₹20 lakhs (revised upward from ₹10 lakhs) 
Employee Categories Government employees; private employees covered under the Gratuity Act; employees not covered under the Gratuity Act 
Tax Head ‘Salaries’ for the employee; ‘Income from Other Sources’ if paid to a nominee or legal heir 

Gratuity Tax Rules 

A few specific rules govern how gratuity gets taxed in practice: 

  1. In cases of retirement, resignation, death and a few other defined situations, gratuity may be exempt from tax under Section 10(10) of the Income Tax Act, 1961 
  1. Gratuity received by an employee during their working life is taxed under the ‘Salaries’ head 
  1. If the employee passes away, the gratuity is paid out to their nominee or legal heir instead 
  1. That payout to a nominee or legal heir is classified differently for tax purposes — it falls under ‘Income from Other Sources’ 

Is Gratuity Taxable on Resignation? 

This is where things diverge sharply by employer type. Government employees get full tax exemption on gratuity whether they retire or resign — no upper limit applies. Private-sector employees, on the other hand, get a tax exemption capped at ₹20 lakhs under Section 10(10), regardless of whether they retired or resigned. 

WATCH OUT 

The ₹20 lakh exemption is a lifetime aggregate, not a per-employer limit. If you’ve already used part of it on a previous job’s gratuity, any new payout counts against the same ceiling. 

If your total gratuity across your career exceeds ₹20 lakhs, the excess gets added to your taxable income and taxed at your applicable income slab rate. 

What is the Gratuity Exemption? 

Gratuity exemption is the portion of your gratuity receipt that the Income Tax Act lets you keep tax-free. Under Section 10(10), the rules split into three distinct employee categories, and which one you fall into changes your exemption calculation entirely: 

  1. Government employees, who receive full tax exemption regardless of the amount 
  1. Private employees covered under the Payment of Gratuity Act, 1972, who can claim exemption up to ₹20 lakhs 
  1. Employees not covered under the Payment of Gratuity Act, who follow a separate, more conservative formula explained further below 
     

Knowing which bucket applies to you is the single most useful thing you can do before estimating your tax outgo on retirement or resignation. 

Income Tax Exemption on Gratuity: Category-wise Rules 

Exemptions for Government Employees 

If you work in any of the following government services, your gratuity is fully exempt from tax on termination, retirement, superannuation or disablement: 

  1. Central Government 
  1. State Governments 
  1. Defence Sector 
  1. Civil Services 
  1. Local Municipal Authorities 

Also read: Difference between direct tax and indirect tax 

Exemption for Private Employees 

If you work in the private sector and your employer is covered under the Payment of Gratuity Act, 1972, your exemption is capped at ₹20 lakhs in aggregate. A few specifics to keep in mind: 

  1. The aggregate gratuity you receive across your entire career must not exceed ₹20 lakhs to claim full exemption 
  1. This limit applies cumulatively, not per employer, so gratuities from multiple jobs all count towards the same ceiling 
  1. Any gratuity paid for service beyond 15 days for each completed year becomes taxable 
  1. Salary, for this calculation, includes only your basic pay and dearness allowance (DA), nothing else 

PRO TIP: Quick formula: Gratuity = Last drawn salary x 15 x number of completed years of service / 26. The ’26’ assumes a 26-day working month, since, 4 Sundays are excluded. 

 
Suppose Ayush, a marketing manager in Bengaluru, retires after 12 years of continuous service with a last-drawn basic salary plus DA of ₹50,000. His gratuity works out to ₹50,000 x 15 x 12 / 26, which comes to approximately ₹3,46,154. Since this comes under the ₹20 lakh exemption limit, the entire amount is tax-free in Ayush’s hands. 

Note that you can also use an online gratuity calculator to verify this figure instantly, particularly useful if your service period includes partial years. 

Gratuity Tax Exemption for Employees Not Covered Under the Gratuity Act 

Not every employer falls under the Payment of Gratuity Act, 1972 — smaller establishments with fewer than 10 employees, for instance, may pay gratuity voluntarily without being legally bound by the Act. If you fall into this category, a different and slightly less generous formula applies. 

For employees not covered under the Act, the gratuity exemption is the least of the following three amounts: 

  1. ₹20 lakhs (the statutory ceiling) 
  1. The actual gratuity received 
  1. Half a month’s average salary for each completed year of service, calculated using the average of your last 10 months’ salary 

DID YOU KNOW? 

Formula for employees not covered under the Act: Gratuity = Average salary of last 10 months x 1/2 x number of completed years of service. 

Let’s say Priya, a senior associate in Pune, worked for an 8-employee firm for 9 years. Her average monthly salary over the last 10 months was ₹40,000, and she received a gratuity payout of ₹2,00,000 on resignation. Her exemption is the least of ₹20 lakhs, the actual ₹2,00,000 received, and ₹40,000 x 1/2 x 9, which is ₹1,80,000. Since ₹1,80,000 is the lowest figure, that’s her tax-free portion — the remaining ₹20,000 gets added to her taxable income. 

This distinction matters because employees at smaller firms often assume the same ₹20 lakh, 15-day formula applies to them. It doesn’t, and getting this wrong can mean an unpleasant surprise at tax filing time. 

By understanding how income tax on gratuity works and which exemption category applies to you, you can plan your retirement payout and tax filing with far more confidence. That said, life doesn’t always wait for your gratuity payout. If you need funds before that happens, you can get an Instant Personal Loan of up to ₹10 lakhs in just 2 minutes on Fibe.  
 
Download the Fibe Personal Loan App or sign up on our website to access quick financing whenever you need it. 

FAQs On Gratuity Exemption Limit 

1.Is gratuity taxable or non-taxable? 

Gratuity is taxable under the Income Tax Act, 1961, but you can claim exemption on receipts up to ₹20 lakhs under Section 10(10), depending on your employee category. 

2.How is gratuity calculated for income tax purposes? 

For employees covered under the Gratuity Act, use: Gratuity = Last drawn salary x 15 x number of years of service / 26. 

3.How many times can the gratuity exemption be claimed? 

There’s no cap on the number of times you can claim it across your career, but the cumulative tax-free amount across all claims cannot exceed ₹20 lakhs. 

4.Is gratuity taxable for government employees upon retirement? 

No. Gratuity paid to government employees on retirement, superannuation or termination is fully exempt from tax, with no upper limit. 

5.What is the gratuity exemption section in the Income Tax Act? 

Section 10(10) of the Income Tax Act, 1961 governs gratuity exemption, currently set at ₹20 lakhs. 

6.Is gratuity a part of CTC taxable? 

Gratuity usually forms part of your CTC, but it isn’t taxed when accrued. It’s only taxed when you actually receive it, and only the amount exceeding ₹20 lakhs gets added to your taxable income. 

7.Is gratuity taxable in India for private sector employees? 

Yes, but only beyond ₹20 lakhs. Private employees covered under the Gratuity Act get exemption up to this limit; anything received above it is taxed as per their income slab. 

8.Is gratuity taxable on resignation before completing 5 years of service? 

Generally, gratuity isn’t payable at all if you resign before completing 5 continuous years, except in cases of death or disablement, where the service condition doesn’t apply. 

9.Is gratuity taxable when received on death or disability? 

Gratuity paid to an employee on disablement is taxed under the same Section 10(10) exemption rules as regular gratuity. If paid to a nominee or legal heir after the employee’s death, it’s taxed under ‘Income from Other Sources’ rather than ‘Salaries’, though the exemption limit still applies. 

Last Date for IT Return Filing for FY 2023–24: A step-by-step guide

As a taxpayer, it is important to know the deadline for income tax filing to avoid penalties and interest that you need to pay on the fine. These dates can help you create and stick to a timeline and sort out your finances.  

Generally, the last date for filing your tax for the financial year is 31st July of the assessment year. However, if you miss the date, you can also file the late returns by the end of December of the same year. 

As such, knowing these dates is important to comply with tax laws and file returns on time. Read on to learn about the last date for income tax return filing for the financial year 2023-24, the date for filing advance tax, and other details. 

Income Tax Filing Due Dates for FY 2023-24 (AY 2024-25)

Here is a list of the income tax filing dates for different categories of taxpayers. 

Due DateTaxpayer Category
31st July 2024Individual, Hindu Undivided Family (HUF), Association of Persons (AOP) and Body of Individuals (BOI)
31st October 2024Businesses (with tax audit report)
30th November 2024Businesses filing for ITR requiring transfer pricing reports (in case of international transactions)
31st December 2024Revised returns
31st December 2024Belated or late returns
31st March 2027Updated returns (up to 24 months after the Assessment Year or AY)

Note that for businesses, the income tax audit report due date is 30th September 2024. 

Also Read: Personal Loan Without ITR

Due Dates for Paying Advance Tax for FY 2023-24

Here is the last date for income tax return of advance tax payments. 

Due DateNature of CompliancePayable Tax Amount
15th June 2024First instalment15% of tax liability 
15th September 2024Second instalment45% of tax liability 
15th December 2024 Third instalment75% of tax liability 
15th March 2025Fourth instalment100% of tax liability 
15th March 2025Presumptive taxation scheme100% of tax liability 

What Happens if You Miss the Due Date?

Here are some consequences you will face when you miss the deadline for income tax filing. 

  • You can pay your return along with the late fee and interest charges before 31st December of the financial year
  • You will be liable for paying interest at 1% per month on the unpaid tax amount according to Section 234A 
  • You are liable to pay a fine of ₹1,000 for a net income of up to ₹5 lakhs and ₹5,000 for a net income exceeding ₹5 lakhs
  • You cannot carry forward your losses and offset them against your total income in the subsequent year
  • You can also file for ITR U or updated returns if you miss the 31st December deadline due to some unavoidable reasons

Also Read: Types of ITR Forms in India

Benefits of Filing Income Tax Returns (ITR) on Time

ITR filing on time has many benefits, which are as follows: 

  • It allows you to apply for loans quickly, as most lenders require tax returns as proof of income 
  • In case of TDS deductions, you can claim a refund for the amount that you paid over your tax liabilities
  • It acts as proof of address and income when applying for a visa
  • Filing taxes allows you to claim deductions on your investments, such as FDs, insurance premiums, etc.
  • It allows you to carry forward your losses from the previous year to claim deductions
  • You can avoid paying penalties and interest on your tax returns
  • Not filing your taxes is illegal and has many legal implications

To enjoy all these benefits, it’s imperative to file taxes in a timely manner. Doing so also saves you from any last-minute hassle and reduces the chances of making any errors in taxation. If you need a loan for a last-minute requirement, including paying taxes, then you can apply for a Fibe Instant Personal Loan. 

You can get up to ₹5 lakhs at pocket-friendly interest rates and a comfortable tenure of up to 36 months. There are also no foreclosure charges, allowing you to repay the loan comfortably. So, download our Personal Loan App or go to our website to apply with a completely digital application process and minimum documentation. 

FAQs on ITR Filing Last Date

Can we file a return after 31st December?

Yes, as per the Union Budget 2022 update, you can file for ITR-U if you miss the last date for income tax returns. This allows you to file a return up to 24 months after the deadline of the relevant assessment year.

What is the last date for filing the ITR for 2023-24?

The deadline for income tax filing for financial year 2023-24 or assessment year 2024-25 is July 31, 2024. If you miss the date, you have the option to file a belated return by December 31, 2024. 

TDS Check by PAN Card: Step-by-Step Guide to Check TDS Status Online

A TDS check helps you confirm whether the tax deducted from your salary, interest income, rent, commission or other payments has been correctly deposited with the government. This is important before filing your Income Tax Return, as even a small mismatch can affect your refund or create a tax notice risk.  
 
Wondering how to check my TDS, how to check TDS online or how to check TDS amount using your PAN card? You can verify your TDS status through the TRACES portal, the Income Tax e-Filing portal or authorised net banking. The quickest method is to log in to the Income Tax portal, open Form 26AS and check the tax deducted against your PAN. 

What is TDS and Why Should You Check It? 

TDS stands for Tax Deducted at Source. It is the tax deducted by a payer before making certain payments to you. For example, your employer deducts tax from your salary, banks may deduct tax on interest income and companies may deduct tax on professional fees or commission. 

You should check your TDS because it helps you: 

  • Confirm that the deductor has deposited the deducted tax correctly 
  • Match Form 16, Form 16A and Form 26AS before filing ITR 
  • Avoid claiming incorrect tax credit 
  • Identify missing or wrong entries early 
  • Reduce the chances of refund delays 

For example, if your employer deducted ₹45,000 as TDS during the year, the same amount should reflect in your Form 26AS or AIS against your PAN. If it does not, you should ask your employer to correct the TDS return. 

What is a TDS Return? 

A TDS return is a quarterly statement filed by the tax deductor. It contains details such as the deductee’s PAN, amount paid, TDS deducted, challan details and the quarter for which the deduction was made. 

Here’s a simple way to understand it: 

Person/Entity Role in TDS 
Employer, bank or company Deducts TDS and files TDS return 
Taxpayer/deductee Checks whether TDS is visible against PAN 
Income Tax Department Records the TDS credit in Form 26AS/AIS 

Once the deductor files the return correctly, the TDS amount becomes visible to you online. 

How to Check TDS by PAN Card on the TRACES Portal 

You can do an online TDS check by PAN card through the official TRACES portal. 

Follow these steps: 

  1. Visit the TRACES portal: https://www.tdscpc.gov.in/app/login.xhtml 
  1. Go to the ‘Tax Payer’ section 
  1. Select ‘View TDS/TCS Credit’ 
  1. Enter the captcha and proceed 
  1. Enter your PAN, the deductor’s TAN, financial year, quarter and return type 
  1. Click on ‘Go’ to view the TDS details 

This method is useful when you want to check TDS deducted by a specific deductor. If multiple employers, banks or companies deducted TDS, you may need to check each deductor’s details separately. 

How to Check TDS by PAN Card on the Income Tax e-Filing Portal 

The Income Tax e-Filing portal is one of the most convenient ways to check TDS online. 

Here are the steps: 

  1. Visit the official Income Tax e-Filing portal: https://www.incometax.gov.in/iec/foportal/ 
  1. Log in using your PAN/Aadhaar/user ID and password 
  1. Go to ‘e-File’ 
  1. Select ‘Income Tax Returns’ 
  1. Click on ‘View Form 26AS’ 
  1. Confirm that you want to proceed to the TRACES portal 
  1. Accept the terms and continue 
  1. Select ‘View Tax Credit (Form 26AS)’ 
  1. Choose the assessment year and preferred format 
  1. View or download your TDS statement 

If you download the statement in PDF format, the password is usually your date of birth as per PAN in DDMMYYYY format. For instance, if your date of birth is 12 May 1994, the password will be 12051994. 

How to Check TDS by PAN Card via Net Banking 

You can also check TDS through net banking if your bank is authorised and your PAN is linked to your bank account. 

General steps include: 

  1. Log in to your bank’s net banking portal 
  1. Go to the ‘Tax’ or ‘Income Tax’ section 
  1. Select the option to view Form 26AS or tax credit statement 
  1. You may be redirected to the TRACES portal 
  1. Select the assessment year and view your TDS details 

This route is helpful if you frequently use net banking and want quick access without separately logging in to the Income Tax portal. 

What Information Can You Find in Your TDS Statement (Form 26AS)? 

Form 26AS is a consolidated tax credit statement linked to your PAN. It helps you understand how to check TDS amount deducted and deposited under your name. 

You can find details such as: 

  • TDS deducted from salary, interest, rent or other income 
  • TCS collected, if applicable 
  • Refunds issued during the assessment year 
  • TDS on sale of immovable property 
  • TDS on certain financial transactions such as securities or mutual funds 
  • Details of defaults or corrections, where applicable 

Before filing ITR, compare Form 26AS with Form 16, Form 16A, AIS and your bank statements. If there is a mismatch, contact the deductor and request correction before filing your return. 

Common Reasons Your TDS May Not Reflect 

Sometimes, your TDS may not appear immediately. Common reasons include: 

Issue What You Should Do 
Deductor has not filed the TDS return Follow up with employer, bank or payer 
Wrong PAN used in the TDS return Ask the deductor to revise the return 
Return filed recently Wait for processing and check again 
Incorrect TAN or quarter selected Recheck the details entered 
Mismatch between Form 16 and Form 26AS Request correction from the deductor 

A good rule is to check your TDS before the ITR filing deadline, not at the last minute. As tax experts often advise, ‘Your ITR should match the tax records available with the department, not just your salary slip or bank statement.’ 

Quick Example: How TDS Check Helps 

Suppose your bank deducted ₹8,000 as TDS on fixed deposit interest. While filing ITR, you check Form 26AS and see only ₹5,000 reflected. In this case, claiming ₹8,000 may create a mismatch. You should first ask the bank to correct the TDS return so the full ₹8,000 appears against your PAN. 

This simple check can help you avoid refund delays and unnecessary follow-ups later. 

Need Funds While Managing Tax Payments? 

Managing taxes, EMIs and sudden expenses together can put pressure on your monthly budget. If you need quick access to funds, you can explore a Fibe Instant Personal Loan and check your eligible loan amount, interest rate and repayment tenure online. 

With a digital application journey, minimal documentation and quick approval, Fibe helps you manage planned and unplanned expenses with ease. Download the Fibe Personal Loan App or apply through the website to check offers based on your eligibility. 

FAQs on TDS Check by PAN Card 

1. How can I check my TDS status online? 

You can check your TDS status online through the Income Tax e-Filing portal, TRACES portal or authorised net banking. Log in, open Form 26AS and verify the TDS credited against your PAN. 

2. How can I get my TDS return details? 

If you are a taxpayer, you can view your TDS details in Form 26AS through the Income Tax portal or TRACES. If you are a deductor, you can log in to TRACES and access filed TDS return details. 

3. How can I download a TDS certificate? 

If you are salaried, your employer provides Form 16. For other deductions, the deductor may provide Form 16A. Deductors can download TDS certificates from TRACES by logging in, selecting the relevant form, choosing the financial year and quarter, completing verification and downloading the certificate once processed. 

4. How do I check TDS deducted from my salary using my PAN card? 

Log in to the Income Tax e-Filing portal and view Form 26AS. Salary TDS deducted by your employer will appear against your PAN if the employer has filed the TDS return correctly. 

5. What is the password to open a downloaded TDS statement? 

The password is generally your date of birth as per PAN in DDMMYYYY format. For example, if your date of birth is 04 July 1990, the password will be 04071990. 

6. Can I check TDS status without logging in to the Income Tax portal? 

Yes, you can use the TRACES portal’s taxpayer services or access Form 26AS through authorised net banking if your PAN is linked to your bank account. However, for a complete view, logging in to the Income Tax portal is usually the most convenient option. 

What is a Moratorium Period in Loans and How It Works

You might wonder what is moratorium when looking at loan terms. It’s simply a pause on your EMI payments for a limited time. During this break, you don’t need to repay the loan, and there’s usually no penalty. It’s a helpful option built into many loans to give you some breathing space when needed.

Keep reading to learn more about what is moratorium period and how it works.

Moratorium Period Meaning

Lenders define moratorium period meaning as a legally allowed break from repayment. It can be offered at the start of your loan or later in case of genuine financial stress. It’s a facility lenders offer when you’re unable to pay EMIs due to reasons like job loss, health issues or cash flow crunch. 

It’s not automatic. You need to request it and your lender must approve it. But even though your EMIs are on pause, interest still adds up. Once the period ends, you must start regular EMIs again based on a revised schedule. Once the moratorium ends, your EMIs or tenure may increase to adjust for the missed payments.

How Does a Moratorium Period Work?

When the lender approves your request for a moratorium, they will halt your EMI payments. However, interest will still be levied and added to your total outstanding amount. Once the period ends, your lender will give you a new schedule as your outstanding amount will change. This leads to an increase in your EMI, your tenure or both, depending on the agreed plan.

You might also hear the term grace period, but it’s different from a moratorium. A grace period gives you a short window, usually up to 15 days after your EMI due date. Within this grace period, you can pay without a penalty. A moratorium, on the other hand, offers a longer break. 

What is an Example of a Moratorium Period?

Let’s say you have a personal loan of ₹2 lakhs at 12% interest for 2 years. You’ve already paid 6 EMIs. Due to job loss, you opt for a 3-month moratorium. Here’s what happens:

  • Interest keeps adding up for those 3 months
  • Your outstanding loan amount increases
  • Your lender either extends the tenure or revises your EMI

So, you skip EMIs for a short time, giving you breathing room. But your overall loan cost goes up.

How Do Lenders Calculate Interest During the Moratorium Period?

Continuing with the earlier example, let’s assume you have a personal loan of ₹2 lakhs at 12% annual interest for a tenure of 2 years. Now, due to a temporary income pause due to a job loss, you opt for a 3-month moratorium.

During this period, your EMIs are on hold. But interest keeps adding up on the pending principal.

Here’s what happens:

  • Monthly interest: ₹2,00,000 × 12% ÷ 12 = ₹2,000
  • Total interest for 3 months moratorium: ₹2,000 × 3 = ₹6,000

This ₹6,000 gets added to your outstanding loan amount. Once the moratorium ends, your lender may either increase your EMI, extend the tenure or adjust both. This ideally depends on the repayment plan you choose.

Advantages and Disadvantages of the Moratorium Period in a Loan

There are some benefits you can enjoy by opting for a moratorium period in a personal loan or any other loan. In addition to these advantages, there are also some drawbacks that you may have to face. 

AdvantagesDisadvantages
Helps you avoid default when facing a crisisTotal interest payout increases
Gives you time to stabilise your financesYou may need to pay higher EMIs after
No impact on your credit scoreYour loan tenure may get longer
No penalty charges during the breakNot available automatically, you must apply

Armed with this information about the provision and its pros and cons, decide if this option is worth it. One way to minimise the burden of repayment is to avail a loan on affordable terms. The Fibe Instant Cash Loan is one such option and you can get up to ₹5 lakhs at affordable rates.
Moreover, you enjoy flexible tenures and zero foreclosure charges, allowing you to have a comfortable experience. Download our Personal Loan App or apply on our website to get started!

FAQs on the Moratorium Period 

How is interest calculated during the moratorium period?

Lenders compute interest during this period using the simple interest formula. This interest is levied on the outstanding amount for the period and not the entire principal amount. This amount is then added to the payable amount, increasing the number of EMIs or the EMI amount. 

What is the moratorium period for personal loans?

It is the period during which you don’t have to pay instalments and its length depends on the agreement between the lender and the borrower. 

How much will the EMI increase after the moratorium?

It depends on how long the moratorium period was and the interest applied during it. 

Can I pay EMI during the moratorium period?

No, you don’t have to pay any EMIs during a moratorium period on personal loan or any other loan.

Credit Control Meaning, Role, Types & Why It Matters

What is credit control and why does it matter when you apply for a loan? Simply put, credit control meaning refers to how lenders decide who gets credit, how much and on what terms. It helps banks and NBFCs avoid lending to risky applicants. 

If your credit score is low or you’ve missed EMIs, you might face rejection or higher interest rates. The good news? You can fix this. Pay your dues on time, keep credit use low and build a steady repayment record.

So, read on to explore how lenders use this system, what factors affect it and how it impacts your credit journey.

What is Credit Control?

In simple terms, it refers to the policies and practices that financial institutions have to manage and mitigate their risk of lending. Effective implementation of credit control allows lenders to lower the risk of non-payment or default, which will help them manage their cash flow. 

Key Features of Credit Control:

  • Helps lenders stay financially stable
  • Only creditworthy customers get loans
  • Reduces default risk and improves cash flow
  • Tracks repayment behaviour to avoid over-borrowing

How Credit Control Works?

Credit control means setting up systems to manage and limit risk while giving credit. Here’s how the process usually works:

  • Assess borrower’s ability: Lenders check income, credit score and past repayment behaviour
  • Set credit limits: Based on this, they decide how much credit to offer
  • Track credit use: They regularly monitor how the credit is being used and if payments are made on time
  • Report to credit bureaus: Borrower activity is shared with bureaus like CIBIL, which affects credit scores
  • Take action when needed: If a customer defaults, they may reduce the limit, add late charges or block further credit

It’s not just lenders, even businesses use credit control. They do this to ensure they get paid on time and protect their cash flow. 

Example of Credit Control

  • Business example: A manufacturer checks a distributor’s payment track record. If payments are delayed, they shorten the payment window or ask for partial upfront payment.
  • Consumer example: When you apply for a phone on EMI, the company or store checks your CIBIL score. If it’s low, they may ask for a down payment or decline the EMI offer.

Types of Credit Control

Now that you know the meaning of credit control, here are its types: 

Credit Assessment

This is the primary process of credit control, as it involves evaluating the borrower’s creditworthiness based on the past credit behaviour. This can include:

  • Reviewing credit score 
  • Evaluating financial capacity through income statements 
  • Checking credit history

Credit Terms and Conditions

Another type of control is defining the terms for lending, such as deciding on a comfortable, affordable interest rate, penalty amount and payment date. This step is important to maintain transparency and facilitate on-time payments from the borrower. 

Credit Monitoring and Reporting

With this type of control, lenders can report any delinquencies, delays and defaults by the borrower. This allows them to effectively manage the risk and take the appropriate steps to avoid financial loss. 

Debt Collection

This is an essential component involving strategies to recover the loan amount. For example, if the borrower is unable to pay the EMI due to unforeseeable circumstances, lenders can negotiate and adjust the repayment structure. They can also appoint collection agencies to recover the amount. Lenders may even pursue legal actions for this.

Credit Insurance

This type of control is ideal for protecting lenders against default arising due to bankruptcy, loss of job, health issues, insolvency or other reasons. With this, they can minimise their loss and maintain cash flow.

Importance of Credit Control 

In addition to mitigating the risk of lending, the objectives of credit control involve:

  • It helps set clear terms for repayment of the borrowed amount and interest
  • It allows lenders to decide which borrower can afford the loan
  • It allows them to reduce the chances of facing financial loss due to the poor financial management of the borrower
  • It helps regulate the cycle of credit, as reporting the credit behaviour helps other lenders assess the borrower’s financial capacity 
  • It helps protect the borrower from over-borrowing and falling into a debt trap
  • It helps maintain legal and ethical regulations set for lenders as well as borrows

Also Check: How To Get 1 Lakh Personal Loan 

Disadvantages of Credit Control

Although there are many benefits, there are some limitations of credit control. With its implementation, financial institutions may face: 

  • Increased administrative costs of credit management
  • Reduced sales due to strict policies and terms
  • Challenges in balancing sales growth and credit control 
  • Damaged consumer relationships due to stringent terms and policies

Armed with this information, you can better understand your borrowings. It also enables you to make an informed decision and choose the ideal financing option. If you are looking for affordable and instant funds, you can rely on the Fibe’s Personal Loan. 

You can get up to ₹5 lakhs for your umpteen financial requirements, be it planned or unplanned. It comes with an affordable interest rate starting at 2% per month, flexible tenure option and zero pre-closure charges. Download the Fibe Personal Loan App now or apply on our website to enjoy a comfortable borrowing experience. 

FAQs on Credit Control

What are the credit control types?

This strategy involves 5 types of control:

  • Credit assessment
  • Credit terms and conditions
  • Credit monitoring and reporting
  • Debt collection
  • Credit insurance

What is the credit control cycle?

This is a systematic process followed by the lender to manage their lending. It includes evaluating the borrower’s credit profile, setting credit limit, monitoring credit use, tracking repayment and reviewing the account.

How Does Repo Rate Affects Interest Rates of Personal Loans?

Do you know how the repo rate increase affects your personal finances? When you apply for a loan, lenders levy an interest rate. However, this isn’t a random number but a carefully calculated rate based on the prevailing repo rate and the institution’s policy.

Here are some essential points that you need to know:

  • The repo rate is the rate of interest at which financial institutions borrow funds from the RBI. 
  • The Reserve Bank of India (RBI) decides this rate based on many economic factors. 
  • Since it impacts the lender’s borrowing cost, it indirectly affects your personal finances, too. 
  • Currently, the repo rate fixed by the RBI is 6.50%. 

What is a Repo Rate?

The repo rate or ‘Repurchase Rate’ means the interest rate at which the Reserve Bank of India gives money to NBFCs and Banks in India. So, the cardinal rule is that the higher the repo rate, the higher the interest rate. Knowing this beforehand helps you better understand the repo rate effect on a personal loan and other forms of credit. 

How are Personal Loan EMIs Affected by the Repo Rate?

Thinking how does repo rate affects the interest rates of your personal loans? Generally, the RBI increases the repo rate to combat high inflation. If the RBI wants to increase the circulation of money in the economy, it lowers the repo rate. On the contrary, if the RBI wants to reduce borrowing by banks, it increases the rate to minimise the liquidity in the market.

So, an increase in the repo rate affects a personal loan, as well as business, home and other loan interest rates. Since interest rates have a direct effect on your EMI amount, an increase in the repo rate will also increase your EMI. 

On the other hand, lenders borrow funds at a lower interest when the RBI reduces the repo rate. In such cases, the interest rate also lowers as they offer loans at a lower rate. 

Simply put, a cut in the repo rate decreases your loan EMIs while an appreciation in the repo rate will increase your loan EMIs.

What are the Factors Affecting Your Personal Loan EMI?

In addition to the repo rate effect on a personal loan, here are some other factors that affect your interest rates and EMIs.  

Credit Score

Lenders charge a higher interest rate if you have a low credit score to mitigate the risk of providing the loan. If you apply with a good credit score, you can get credit on favourable terms, thereby minimising your borrowing costs. 

Loan Amount 

A higher loan amount also increases the risk for lenders. To enjoy lower EMIs and affordable interest rates, borrow only the amount you need. 

Repayment Tenure 

Interest rates and tenure have a reciprocal relationship; as one increases, the other decreases. Opting for a longer tenure will decrease your EMI, but remember that your interest payment will increase over the tenure.

Debt-to-Income Ratio 

Lenders may hesitate to provide your loan at a lower interest rate if you already have an ongoing loan. However, if you have a good score, lenders can rest assured of your repayment capability and may consider your loan application on favourable terms.

Your Net Income 

Showing a higher income is one way to opt for a lower interest rate on your personal loan. Generally, lenders prefer employed individuals with steady work experience. 

Lender-borrower Relationship

When you apply for a loan with an existing or past borrower, they have your record of repayment history. Based on that, you can get a personal loan at a lower interest rate, decreasing your loan EMIs.

In conclusion, the repo rate changes based on the economic situation and RBI monetary policies. Hence, apply for a loan when the repo rate is lower as interest rates will be more affordable. 

One such budget-friendly credit option you can consider is the Fibe Instant Cash Loan. With this type of credit, you can meet all your urgent financial requirements at affordable interest rates starting from 2% per month. 

It also has a speedy approval process and flexible tenure option with minimum documentation requirements, helping you tackle your financial needs hassle free. Download the Personal Loan App or go to our website to get up to ₹5 lakhs in a few clicks.

FAQs on How Repo Rates Affect Personal Loans

Does the repo rate affect personal loans?

Yes! This rate set by the RBI affects the interest rate offered by the lender. This way, it has a direct effect on your personal loan as well as other types of credit. 

How does a hike in repo rate affect your personal finances?

When the RBI repo rate for personal loans increases, the cost of borrowing subsequently increases. Thus, if you have a floating interest rate loan, your EMI will increase with the hike in the repo rate. 

Is the increase in the repo rate good or bad?

An increased repo rate has many pros and cons. For example, the interest rate on loans may increase, but individuals with FDs and savings can get better returns.

Online Loan Payment: Know Its Methods, Benefits, Tips and More

With many convenient options available, you can effortlessly make an online loan payment. This is because modern financial service providers allow you to manage your loan EMI online. As such, you can pay easily through multiple online options at your convenience.

You can use a lender’s portal or third-party payment apps to conveniently:

  • Pay your current and/or previous EMIs 
  • Make pre-payments 
  • Foreclose your loan

Knowing about the options that facilitate these payments will allow you to effortlessly manage your loan in just a few clicks. Read to know how to pay EMIs online, its key benefits and some security measures to keep in mind.

How to Pay Your Loan EMIs Online?

Follow these steps to make secure and rapid online EMI payments:

Through Net Banking 

  • Step 1: Visit your lender’s net banking or digital loan portal 
  • Step 2: Log in with your customer ID and password 
  • Step 3: Go to the loan section 
  • Step 4: Select the loan account
  • Step 5: Enter the amount you want to pay
  • Step 6: Select your preferred payment method
  • Step 7: Complete the payment and wait for confirmation 

Through Mobile App

  • Step 1: Download the lender’s mobile app on your device 
  • Step 2: Register on the app and log in with your credentials 
  • Step 3: Navigate to the loans section
  • Step 4: Select the account 
  • Step 5: Enter your EMI amount and preferred payment method 
  • Step 6: Complete the payment and save the confirmation

On the Third-Party App 

  • Step 1: Launch the payment app and log in
  • Step 2: Go to the ‘Bills and Payment’ section and select the ‘EMI Payment’ option 
  • Step 3: Enter the required loan details and EMI amount
  • Step 4: Choose your preferred payment option 
  • Step 5: Authenticate the payment 
  • Step 6: Confirm all your details and proceed with the payment 

Note that the mobile app interface for all lenders may differ slightly. However, following the instructions on your app will help you complete the transaction promptly. Once done, you will receive a confirmation from your lender. 

Also Read: Want a lower EMI For a Personal Loan?

Advantages of Paying Personal Loan EMI Online

Here are some benefits you enjoy with online loan EMI payment. 

  • Once you have made your EMI payment, set up reminders to ensure not to miss due dates
  • Most of the online services are secure and reliable
  • You get an instant receipt to keep a record of your payments
  • You can use different modes to pay such as net banking, UPI, mobile wallets, etc. 
  • With the internet around, you can make payments smoothly anytime and anywhere.
  • The complete process takes just a few minutes
  • You do not need to verify or get permission from your lender 
  • You get instant confirmation 
  • You can even pay EMIs online on bank holidays 
  • You can also make advance payments or pay overdue EMIs 

Security Tips for Making Online Payments 

Here are some security measures you must follow for online loan payments. 

  • Choose a trusted platform when making the payment, especially when using third-party applications
  • Choose a user-friendly interface to avoid errors
  • Make sure the web portal or mobile app has the recommended security protocols
  • Verify if there are any transaction fees 
  • Always recheck your account details and payment amount before submitting

With these tips, you can automate your loan EMI payment to avoid penalties and late payment charges. If you want to apply for a 100% digital loan with flexible tenure options, choose Fibe. 

With our Instant Personal Loan, you can enjoy up to ₹5 lakhs with affordable interest rates and a completely hassle-free digital application process. With minimum documentation and quick approval, you can avail of this option for any urgent financial requirements. Download our Personal Loan App or visit our website to apply now! 

FAQs on Online EMI Payment 

How do I make a loan payment online?

To make an online EMI payment, you can log into the lender’s mobile or web portal or use third-party apps. On the portal, select your loan account, enter loan details and provide other information. Once done, you can choose a card, net banking, UPI or any other option to make transactions. 

How is an EMI payment done?

To make an online payment, you can choose from many online and offline options, depending on your convenience. After providing your loan details, you will receive your payable amount, which you can pay using your preferred option. Upon completing the payment, the amount will be deducted from your account. Your outstanding balance will then be reduced based on your payment. 

How can I pay EMI after the due date?

If you have any overdue EMIs, you can pay them online. On the net baking portal, enter your loan details to get the details of your past dues. Here, you must select the option to check your overdue or total payable amount and make payment. 

How can I check my EMI online?

To check your EMI online, you can go to your lender’s net banking portal or on the mobile app. Some UPI-based payment apps also allow you to check your EMI and make payments directly.

4 Credit Bureaus in India – Meaning, Role & Functions

India has 4 RBI-approved credit bureaus in India that track how you use and repay credit. These bureaus are TransUnion CIBIL, Experian, Equifax and CRIF High Mark. Among them, CIBIL is the most commonly used, especially when lenders assess individual borrowers.

These credit information companies collect repayment details from banks, NBFCs and other lenders. Lenders then use this data to check your credit risk before approving a loan or credit card. Understanding the credit bureaus’ meaning and how they work helps you stay in control of your credit profile. This can also help you make better financial decisions.

Four Major Credit Bureaus in India

There are 4 main credit score companies in India, all licensed by the RBI:

  • TransUnion CIBIL: The most widely used credit bureau in India. Lenders usually refer to this score while evaluating individual loan and credit card applications.
  • Experian: A global credit bureau that provides credit reports for individuals and businesses, along with data insights and analytics.
  • Equifax: A trusted bureau that focuses on analysing credit behaviour and risk for both individuals and businesses.
  • CRIF High Mark: An Indian credit bureau known for its strong presence in retail and microfinance credit reporting.

Each bureau follows its own scoring model and data sources. This is why your credit score may differ slightly across different reports.

How Do the Credit Bureaus in India Work?

Credit bureaus collect information about your loans and credit cards from the lenders you borrow from. This includes how much you have borrowed, how you repay and any outstanding balances. Using this data, they create your credit report and credit score. Lenders then use this information to decide whether to approve your application and what terms to offer you.

Credit Bureaus in India

Here’s a closer look at the credit bureaus in India and how each one works.

  1. CRIF High Mark

CRIF High Mark was founded in 2007 and became the first Indian credit bureau to offer full-service credit information. It received its RBI licence in 2010 and operates from Mumbai.

It provides services such as:

  • Credit risk management
  • Portfolio monitoring
  • Fraud prevention

For individuals, CRIF High Mark credit scores usually range from 300 to 900, with higher scores signalling better credit health. For businesses, it follows a 1-5 scoring scale, where 1 is the best.

  1. Experian

Experian began operations in India in 2010, although its global credit information history dates back to 1826. For individuals, Experian credit scores range as follows:

  • 800 and above: Excellent
  • 750 to 799: Very good
  • 650 to 749: Good
  • 550 to 649: Fair
  • Below 549: Poor

It works with both individuals and businesses and also offers analytics and market insights.

  1. Equifax

Equifax was established in 1899 and entered the Indian market in 2010. It evaluates your credit profile based on factors like repayment history, credit utilisation, defaults and credit length. 

For individuals, the Equifax credit score ranges from 300 to 900. It also provides business-focused metrics such as Payment Index and Commercial Delinquency Score to help manage commercial credit risk.

  1. TransUnion CIBIL

CIBIL was incorporated in 2000 and is the oldest and most widely acknowledged credit information companies in India. It became TransUnion CIBIL after being acquired in 2016. 

CIBIL collects data related to your loans, credit cards, repayment behaviour and credit mix. For individuals, the score ranges from 300 to 900, with higher scores reflecting better creditworthiness.

Who Can Be a Credit Information Company (CIC)?

As per RBI guidelines, credit inform,ation companies are: 

  • Registered under Indian laws
  • Have RBI approval under the CIC Act, 2005
  • Collect and maintain borrower credit data
  • Follow strict data security and privacy norms

These credit information companies in India are regulated to protect borrower information.

Functions of Credit Bureaus

Credit bureaus perform several important functions:

  • Collect credit data from banks and lenders
  • Generate credit reports and credit scores
  • Help lenders assess borrower risk
  • Support faster and safer loan approvals
  • Enable borrowers to track and improve their credit health

Credit Report Cost and Fees in India

Checking your credit report is usually free. All RBI-approved credit score companies in India allow you to access one free credit report every year.

If you want to check your report more often, some credit information companies in India may charge a small fee. The cost depends on the bureau and the type of report you choose. For most people, the free annual report is enough to track credit health and spot errors early.

Credit Report Dispute Process in India

If you notice any mistakes in your credit report, you can raise a dispute with the credit bureau that issued the report. The process is mostly online and easy to follow.

Here is how the dispute process usually works:

  • Log in to the credit bureau’s website
  • Select the option to raise a dispute
  • Choose the type of error you want to report
  • Share the correct details and supporting documents

Once you submit the dispute, the credit bureau contacts the lender who shared the data. This lender is also called the data furnisher. The credit report is updated only after the lender verifies the correction. Most disputes are resolved within 30 days, depending on how quickly the lender responds.

Credit Rating Agencies vs Credit Bureaus

Credit bureaus focus on individual and business borrowing behaviour. Credit rating agencies assess the creditworthiness of companies and governments. Simply put, credit bureaus help lenders evaluate borrowers. And credit rating agencies evaluate institutions and large entities.

By being informed about facts like what is the credit bureau and how it impacts your borrowing, you can improve your score and access credit easily. Having said that, if you are looking for instant credit with easy-to-meet eligibility criteria, apply for a Fibe Instant Personal Loan. 

You can avail of a loan of up to ₹10 lakhs with a flexible tenure and at attractive rates. We also don’t rely on credit scores and employ an alternate credit scoring mechanism. This allows us to offer credit even if you don’t have the ideal score. So, download the Personal Loan App or go to our website to apply now! 

FAQs on Credit Bureaus in India 

Which credit bureau provides the most accurate credit report?

All RBI-approved credit bureaus provide accurate data based on information shared by lenders. However, TransUnion CIBIL is the most commonly used by lenders in India for individual credit assessment.

How are credit reports used by lenders?

Lenders use credit reports to check your repayment history, existing loans and overall credit behaviour. This helps them decide whether to approve your application and what interest rate to offer.

Which is the oldest credit bureau in India?

The TransUnion CIBIL is the oldest and one of the most popular bureaus in India.

Know How to Read CIBIL Report in Simple Steps

If you know how to find a CIBIL report and read it, you can easily assess your financial standing. When you download and read a credit report, it helps you understand your credit health and take the right steps to boost your creditworthiness.

A CIBIL report is a detailed file of the account holders’ financial history and repayment transactions. This includes records of loans taken, information on current and past credit card accounts, repayment defaults, etc. 

Know how to read a CIBIL report, key terms you must understand in a credit report and more. 

Also Read: Check Cibil Score With a Pan Card

How to Read a CIBIL Report? 

Here are the details included in your CIBIL report and their meaning.   

CIBIL Score

The first section of the report is your credit/CIBIL score, which is a three-digit numerical representation of your creditworthiness, ranging between 300 and 900. To calculate this number, credit bureaus assess the following factors: 

  • Repayment history 
  • Credit mix
  • Credit utilisation ratio
  • Outstanding credit
  • Length of your credit history
  • Recent credit enquiries

Personal Information

The second section of the report includes your personal details, such as: 

  • Name 
  • Date of birth
  • Gender
  • PAN card number 
  • Permanent and residential address 

You must verify all this information to ensure there is no discrepancy when financial institutions send your report. 

Contact Information

This section contains all your present and past records of contact details, such as: 

  • Phone number
  • Landline number
  • Email address

Employment Information

This section contains information about your employment type, income and gross income. 

Account Information

This is the most crucial section of your report, containing all your open and closed account details. This section includes:

  • Issuer/ lender’s name
  • Account type
  • Account number 
  • Ownership information 
  • Credit limit
  • Pending dues
  • Interest rates
  • Outstanding balance
  • EMI amount 
  • Tenure, etc. 

Financial institutions provide this information to credit bureaus periodically. In case you find any discrepancy in this section, you can raise a dispute for rectification. 

Yellow Box

This box in the ‘Account Information’ section gives you an update on the raised dispute. Once your dispute gets resolved, the box will disappear from the updated report. 

Enquiry Information

When you apply for a new credit, financial institutions make an enquiry to check your credit score. This section shows a record of such enquiries. 

Also Read: Importance of Credit Rating and How to Check

Some Common Terms to Know 

To read a credit report and understand it, here are some essential terminologies that you must know. 

Term Meaning 
Amount OverdueUnpaid amount to the financial institution  
Credit UtilisationPercentage of credit limit used 
Credit Limit The maximum withdrawal limit for a credit card 
Collateral Asset pledged as security 
CN (Control Number) A 9-digit number for your dispute raised
Sanctioned Amount Total loan amount  
Written Off AmountOutstanding amount after loan settlement

How to Download a CIBIL Report

You can download one free report annually on the CIBIL website by clicking on the ‘Get Your Free CIBIL Score & Report’ tab. Enter your details and select ‘Accept and Continue’ to download your free report. If you want to get your report periodically, you can opt for a subscription.

Checking your report not only helps you keep a tab on your financial health but also allows you to spot errors and raise disputes if necessary. Since most lenders and credit card issuers require a CIBIL score of 750 or above, doing this will help you easily achieve that. 

However, if your score isn’t high enough and you need instant funds, you can apply for a Fibe Instant Personal Loan and get up to ₹5 Lakhs instead. At Fibe, we employ an alternative scoring mechanism that allows us to provide financial assistance even to those new to credit.

What’s more, you can choose from a flexible tenure of up to 36 months and enjoy 100% digital application for a comfortable experience. So download our Personal Loan App or register on our website to apply now. 

FAQs on Reading CIBIL Report

How do you analyse a credit report?

Here are the steps to follow to analyse your credit report.

  • Step 1: Understand the common terms 
  • Step 2: Verify your personal and contact information 
  • Step 3: Check the number of accounts and their details 
  • Step 4: Review your credit history and take note of any missing or incorrect information
  • Step 5: Raise a dispute if there are any errors 

What is shown in the CIBIL report?

A CIBIL report contains all your financial and personal information, such as: 

  • Total CIBIL score
  • Personal details like date of birth, address and identification details 
  • Contact information like phone number and email ID 
  • Employment information
  • Account information
  • Enquiry information

How can I check my detailed CIBIL report?

You can download your free CIBIL report on their official website and check the required information. 

Which credit report is accurate?

The report generated by TransUnion CIBIL is the most popular one used by most lenders.

Top APR Vs APY Differences: A Comprehensive Guide

The APR vs APY comparison is quite interesting as it focuses on interest calculations for two varied instruments. While the APY focuses on the gains you earn as an investor, the APR relates to the cost of borrowing. However, this isn’t the only difference between APR and APY. 

Read on for insights to compare the annual percentage yield vs the annual percentage rate and to make informed decisions. 

What is the APR?

APR commonly known as Annual Percentage Rate, dictates the cost of borrowing. It mainly applies when you avail of credit and provides a more holistic overview of the amount you owe. 

This is because the APR includes all associated charges applicable to the instrument. As such, you get a clearer picture of the total cost, which isn’t possible if you only assess the interest rate. Typically, the APR will include: 

  • Administrative fees
  • Documentation charges
  • Processing fees
  • Verification charges

This list isn’t exhaustive but highlights a few charges you incur when you opt for a loan. It is also important to note that there are two types of APRs based on the interest rate. 

  • Variable APR: Here, the interest rate fluctuates based on macroeconomic factors, so the APR may be set within a range.
  • Fixed APR: Here, the interest rate is set right from the start and represents the actual cost of the credit you avail. 

Also Read: A Guide to Annual Percentage Rate (APR)

What is the APY?

APY is the abbreviation for ‘Annual Percentage Yield’ and it dictates the actual rate at which your money grows in the given timeframe. This is where the difference between APR and APY is most apparent, but like the APR, the APY offers a clearer representation. 

This is because the APY accounts for interest compounding, which affects the total earnings. For instance, suppose the interest rate you get is set at 8% for an investment of two years and the compounding frequency is quarterly. Then, the APY works out to 8.24%. 

Do note that this is only applicable to investment instruments that have a compounding frequency. For simple interest instruments, the APY and the interest rate are identical. 

Like the APR, the APY also has two types. 

  • Variable APY: Here, the interest rates may change due to external factors and so the APY will fluctuate.
  • Fixed APY: Here, the interest rate and the compounding frequency do not change and will remain the same until maturity. 

Annual Percentage Yield vs Annual Percentage Rate: Key Differences

The following table highlights the main differences between APR and APY. 

ParameterAPRAPY
ApplicabilityLoans and revolving credit instrumentsInvestments 
Interest calculationDoes not account for interest compounding Accounts for interest compounding 
Formula((Interest + Fees / Loan amount) / Number of days in loan term)) x 365 x 100 (1 + r/n) n – 1
Here, r= interest rate, n= compounding frequency
LimitationsDoesn’t accurately represent the true cost of availing credit but it is a viable estimate to considerDoesn’t account for the risks and any other external factors that can affect interest earnings

Also Read: How to Manage Your Credit Card APR

What is a Good APY Rate?

APY rates move up and down often based on various factors. However, since it determines the rate of financial growth, a higher APY is always better. APY rates applicable to savings accounts are generally higher when the monetary policy is tight. In addition to that, there are saving accounts that are low-cost and high-yield in nature that consistently provide competitive APYs.

What is a Good APR Rate?

APR is the total cost associated with borrowing money. Therefore, a lower APR is better for you than a higher one. The rate will also vary based on the following:

  • Purpose of the loan
  • Duration of the loan
  • Macroeconomic conditions affecting the lending policies

In general, the best APR would be 0%. This means no interest on the borrowing, even if it’s for a short-term introductory period.

How To Calculate APR and APY

You can calculate APY easily using the following formula:

APY is (1+r/n) n – 1

In this formula, 

  • r = The period rate
  • n = The number of compounding periods

Use the following formula to calculate APR:

APR= [{(Fees + Interest)/ Principal}/ n] *365*100

In this formula,

  • Interest = The total interest expected for the credit
  • Principal = The loan amount
  • n = The number of days left in the loan term

APR vs APY: When Do the Differences Matter?

On comparing the annual percentage yield vs annual percentage rate differences, it is clear that these serve two very different purposes. The differences only matter when assessing the viability of loans and investment instruments. 

This is because: 

  • APY highlights the interest you earn from an investment
  • APR highlights the cost of borrowing with the interest rate as one of the contributing factors 

Remember, the APR and APY do not apply to the same instruments. You never have to choose between the two. As such, comparing the APR vs APY only helps when looking to understand more about the terms. 

With answers to popular questions such as, ‘What is APR?’, ‘What is APY?’ and others, you can make better decisions when investing or borrowing. When it comes to the latter, always choose lenders that focus on transparency and affordability. 

At Fibe, you can get an Instant Cash Loan of up to ₹5 lakhs and without worrying about any hidden charges. What’s more, you enjoy a completely digital journey alongside a flexible repayment experience. The funds you get have no end-use restrictions and you can foreclose the loan at no extra charges too. 

Download our Personal Loan App or visit the website and get started today!  

FAQs About the Difference Between APR and APY

Are APY and APR the same?

No. A key difference between APR and APY is that they are used for two different purposes. APR represents the true cost of borrowing and APY represents the interest you can earn from investments. 

How do you calculate APR and APY?

You can calculate both the APR and APY using digital calculators or by using their respective formulae, which are: 

APR= ((Interest + Fees / Loan amount) / Number of days in loan term)) x 365 x 100 

APY= (1 + r/n) n – 1, where ‘r’ is the interest rate and ‘n’ is the compounding frequency

Is APR better than APY?

When it comes to APR and APY, one cannot be better than the other because they are used for different instruments. The APR is for assessing loans and credit instruments. On the other hand, the APY is for investments because it accounts for interest compounding.