No-cost EMI explained: Popular, available but misunderstood — Expert on myths, hidden charges, risks

No-cost EMI has become one of India’s most widely used financing tools, especially for high-value purchases like smartphones, laptops, and home appliances. Marketed as a zero-interest option, the scheme allows consumers to pay for products in monthly installments without any apparent additional cost. The EMI amount, on paper, matches the sticker price of the product—making it appear like a smart, interest-free borrowing option. But as Prateek Singh, Founder & CEO of LearnApp and Zero1 by Zerodha, recently explained in a viral YouTube video, no-cost EMI is often not what consumers think it is.

In his demonstration, Singh compared three payment methods—cash, regular EMI, and no-cost EMI—to show how costs differ. In a standard EMI, a Rs 1 lakh purchase spread over 12 months increases to about Rs 1.08 lakh due to interest, GST on interest, processing fees, and GST on processing fees. The buyer ends up paying roughly Rs 10,700 more, which is expected because interest is explicitly charged.

But things get more interesting with no-cost EMI. Singh explains that while customers believe they are paying only Rs 1 lakh with “zero interest,” the interest is not waived—it’s simply paid by the retailer to the bank or NBFC. For a device priced at Rs 1 lakh, the bank may charge Rs 10,000 as interest for the loan tenure. Instead of billing the consumer, the retailer absorbs this cost to boost sales. Effectively, the retailer sells the product to the bank at a lower price, and the buyer pays the full MRP in installments. The scheme is attractive because it increases footfall and nudges buyers toward higher-value purchases.

Understanding no-cost EMI

A no-cost EMI allows customers to break down the price of a product into fixed monthly installments without paying explicit interest, making high-value purchases easier to afford. The total repayment matches the product’s listed price, eliminating the need for a large upfront payment. This financing option is widely offered by platforms like Amazon and Flipkart and by major retailers in partnership with banks such as HDFC Bank, SBI, and ICICI Bank.

How no-cost EMI really works

Despite the name, the “no-cost” feature can be misleading. While buyers are not charged interest directly, the cost is often absorbed by the merchant or built subtly into the product’s pricing. Some banks may also impose processing fees of 1% to 3%. The Reserve Bank of India has warned that these structures can obscure the true cost by disguising charges as higher product prices or administrative fees. Consumers are advised to read all terms carefully before choosing this option.

Cash vs Regular EMI vs No-Cost EMI

Payment Method: Cash Payment

Amount Paid by Customer: Rs 1,00,000
How the Cost Is Calculated: Full amount paid upfront
Extra Cost to Customer: Rs 0
Who Pays the Interest: No interest involved

Payment Method: Regular EMI

Amount Paid by Customer: approx. Rs 1,10,700
How the Cost Is Calculated: Base price + interest + GST on interest + processing fee + GST on processing fee
Extra Cost to Customer: approx. Rs 10,700
Who Pays the Interest: Customer pays interest directly

Payment Method: No-Cost EMI

Amount Paid by Customer: approx. Rs 1,00,000 (plus small charges like GST on interest portion or processing fees depending on issuer)
How the Cost Is Calculated: EMI equals product MRP; bank charges interest (~Rs 10,000) but retailer absorbs this cost by selling product at a lower price to the bank/NBFC
Extra Cost to Customer: typically Rs 1,500–Rs 1,700
Who Pays the Interest: Retailer pays the interest to the bank/NBFC

Hidden charges

However, Singh highlights that hidden charges still creep in. Even when interest is shown as zero, the EMI structure includes a principal and interest component for accounting purposes, which attracts GST on the interest portion. In one example, the GST added Rs 1,467 to the total. Processing fees and GST on those fees added another Rs 235. A consumer ends up paying around Rs 1,700 more than the product price—not a huge amount, but still contradicting the idea of “no-cost.”

The costs rise further when a buyer attempts to foreclose the loan. Singh cites a case where a consumer trying to cancel midway was charged a foreclosure fee, GST on the penalty, next month’s interest, and GST on that interest, amounting to nearly Rs 900 in extra charges.

But Singh argues that the deeper problem is behavioral. Through a quick assessment, he shows how easy access to no-cost EMI encourages overspending. In his example, the buyer had five ongoing EMIs, 40% of his monthly income going toward repayments, and only enough savings to survive two months without income. Singh warns that the psychological comfort of small monthly payments often leads people to ignore growing financial risk.

He concludes by urging consumers to prioritize financial stability over instant gratification. No-cost EMI may appear convenient, but it is still a loan—and multiple loans can dangerously erode long-term financial peace. “You will get everything you want in life,” Singh says, “just not all at once—and that’s 
okay.”