Missed payments and penal charges
A lender can charge a penalty for a late instalment, but it must be a stated charge, not a higher interest rate, and it cannot itself earn interest.
Verified context. Sources last checked
Missing an instalment has three separate consequences, and it helps to keep them apart: what you are charged, what is reported about you, and how you are contacted. This page covers the first. Reporting is under credit reports and contact is under collections conduct.
What the rules say
- A penalty is a charge, not a rate. Penalties “shall be treated as ‘penal charges’ and shall not be levied in the form of ‘penal interest’ that is added to the rate of interest”.
- No interest on the penalty. “There shall be no capitalisation of penal charges, i.e., no further interest computed on such charges.”
- Ordinary interest continues. A lender “may charge interest on unpaid interest (including on unpaid EMI) at the contracted rate of interest till the date of remediation”. The overdue amount keeps costing what the loan costs; it does not cost more.
- There is no cap, but there is a principle. “Although no upper limit / cap for penal charges has been prescribed”, the Directions say “such charges are not meant to be used as a revenue enhancement tool.”
- Individuals are not to be charged more than companies. For an individual borrowing for non-business purposes, penal charges “shall not be higher than the penal charges applicable to non-individual borrowers for similar non-compliance”.
- It must be written into your documents. The amount and the reason must appear in the loan agreement and the Key Facts Statement. “Providing a reference to the schedule of penal charges displayed on the website” is not enough.
According to the Directions, these rules apply to fresh loans from 1 April 2024 and to existing loans from 30 June 2024. Credit cards are outside this rule and have their own.
What this means for arithmetic
Because the penalty is a flat charge set by each lender, nobody can calculate it for you without your loan agreement. What can be calculated is the ordinary interest on the overdue instalment at your contract rate. That is the only figure our Debt Domino Effect shows for a missed payment, and it is why the tool does not pretend to predict the rest.
What we could not confirm
Whether GST applies to penal charges, and at what rate. The Directions point lenders to the tax authorities and say no more.
Sources
- Reserve Bank of India (Commercial Banks – Responsible Business Conduct) Directions, 2025. Reserve Bank of India, 28 November 2025, updated 1 October 2026. Chapter VIII, Section D, Penal Charges in Loan Accounts.
- Reserve Bank of India (Non-Banking Financial Companies – Responsible Business Conduct) Directions, 2025. Reserve Bank of India, 28 November 2025, updated 1 July 2026. Chapter III, Section C. Same wording.
- Fair Lending Practice - Penal Charges in Loan Accounts, RBI/2023-24/53. Reserve Bank of India, 18 August 2023. The original circular, since carried into the Directions above.
Quotations are from these documents as retrieved on 10 November 2026. Paragraph numbers shift when RBI updates a Direction, so we cite sections by name. This page is general information, not legal advice. For your own loan, the agreement and the lender's written reply are what count.