No-Cost EMI Is Not Free: Where the Interest Hides

Why does a “no-cost” EMI on a ₹3 lakh phone still cost you ₹23,017? Because the interest does not vanish. The bank still charges it. The seller covers it by giving up a discount, and under a no-cost plan that discount is not passed on to you. In our example, assuming a bank rate of 15% a year over 12 months, the hidden interest is ₹23,017, about 7.7% of the ₹3,00,000 sticker price.

What “no-cost” actually means

In a no-cost EMI, the instalments are set so that they add up to the listed price (MRP). You never see a line called “interest”. In an expert’s explanation reported by Business Today, the bank or NBFC still charges interest. The retailer effectively sells the product to the lender at a lower price and absorbs that cost, which helps it boost sales. Jupiter describes the same thing as a seller discount equal to the bank’s interest.

Two things follow. First, the interest is real, and someone pays it. Second, you repay the full MRP in instalments, so you cannot also claim the discount that is being used to cover the interest. Onmanorama gives a small example: a ₹74,900 phone on a six-month plan with instalments of ₹12,483 carries 15% interest of ₹1,873, which is “absorbed as a discount”. The buyer pays the full price and cannot get that discount by paying upfront.

A worked example: the ₹3 lakh phone

Our assumptions: price ₹3,00,000, 12 equal monthly instalments, and a bank rate of 15% a year (1.25% a month). The 15% is an assumption, not a bank quote. Zerodha Varsity puts the implied bank rate at about 15–16% a year, and Onmanorama says banks charge anywhere between 14% and 20% on these schemes. So 15% is a round, plausible number.

The question is: what single payment today equals ₹25,000 a month for 12 months? Here is one way to see it. If you borrowed ₹2,76,983 at 1.25% a month and repaid ₹25,000 every month for 12 months, the loan would be cleared, give or take rounding. So ₹2,76,983 is the cash price that the EMI plan is equivalent to. Finance people call this the present value of the instalments.

That ₹23,017 divided by ₹3,00,000 is roughly 7.7%. In other words, about ₹7.70 of every ₹100 of the sticker price is interest. The reel rounds this to about ₹8.

Three cautions. First, ₹2,76,983 is an implied price, not an offer. A real store may give a higher or lower cash price, or none at all. Second, this calculation leaves out the processing fee and GST, which come on top. Third, a higher bank rate would make the gap bigger.

What RBI said in 2013

RBI circular RBI/2013-14/292, dated 17 September 2013, was addressed to scheduled commercial banks and local area banks. It said that in zero percent EMI schemes on credit card outstandings, the interest element is often camouflaged and passed on to the customer as a processing fee. It added that “the very concept of zero percent interest is non-existent”. It asked banks to keep the processing charge and interest rate uniform for each product or segment, whatever the sourcing channel. The only accepted reason for different rates on the same product and tenor was the customer’s risk rating. Banks were told to desist from these practices.

Note what the circular did and did not do. It targeted interest hidden in processing fees on credit card EMIs. The sources we checked do not say it ended no-cost EMIs, and Business Today still calls them popular. The principle holds either way: interest is always somewhere. In 2013 the circular pointed at the fee. Later sources describe the seller’s discount.

Charges on top of the interest

The ₹23,017 is only the interest. These can come on top:

For scale, Business Today’s ₹1 lakh example shows GST on interest of ₹1,467 and a fee plus its GST of ₹235. That is about ₹1,700 above the product price. Terms differ by merchant, bank and card, so your numbers will differ.

Who this affects, and how

If the store has a separate cash or UPI discount

Then you pay the interest through the discount you give up. Zerodha Varsity works through a phone example where a 12-month no-cost plan offered a ₹5,000 discount. After GST and fees the net was about ₹3,500. Paying upfront gave a ₹4,750 discount, so upfront was better.

If the store has no cash discount

Then the price is the same either way, and the interest is not coming out of your pocket as a lost discount. In Business Today’s ₹1 lakh comparison, paying cash had no extra cost, while a no-cost EMI typically cost ₹1,500–1,700 extra, mainly GST and fees. Here the real costs are those charges and the blocked card limit. Whether spreading the payment is worth that is your call.

If you already have other EMIs

Business Today’s expert gives an example of a buyer with five running EMIs, 40% of monthly income going to repayments, and savings for only two months. His point: a no-cost EMI is still a loan, and small instalments can hide growing risk.

Common mistakes

• Taking “zero interest” literally. The bank charges interest. The seller absorbs it.
• Comparing only the monthly instalment. Compare the total you pay against the cash price.
• Never asking for the cash or UPI price. Without it, you cannot see what the discount is worth.
• Forgetting GST and the processing fee. They sit outside the “no-cost” label.
• Ignoring the blocked limit. The whole purchase value can be held on your card for the full tenure.
• Closing early without reading the terms. It may bring a charge and cancel the discount.

What you can do before you buy

1. Ask for the cash or UPI price separately, before the sale starts.
2. Subtract it from the EMI total. In our example, ₹3,00,000 minus ₹2,76,983 gives ₹23,017. That is the interest you are paying.
3. Add the processing fee and the 18% GST on interest. Check the EMI summary at checkout or in your card app.
4. Check early-closure terms and how much of your card limit gets blocked.
5. Compare cash price against EMI total plus fees and GST, and pick the lower one unless spreading the payment is worth the extra to you.

This is general education, not financial advice. Check the exact terms with your bank and the seller.

Key takeaways

• No-cost EMI is not interest-free. The bank charges interest and the seller absorbs it through a discount.
• In our ₹3 lakh example at an assumed 15% rate, the hidden interest is ₹23,017, about 7.7% of the price.
• RBI said in 2013 that “the very concept of zero percent interest is non-existent”.
• GST on interest, processing fees and early-closure charges can come on top.
• Always ask for the cash or UPI price. The gap between the two prices is your interest.