Is No Cost EMI Really Free in 2026? Hidden Charges Explained

Just a few months ago, most e-commerce brands had their Diwali sales under their usual names. But what sparked the interest of most people was that these sales came with some data points. Some interesting facts were that:

• Orders peaked at over 18,000/minute; 50%+ from last year
• 1 out of 4 spent this Prime Day were on EMI, and 9 out of 10 EMI purchases were driven by No Cost EMI for the purchase of smartphones, electronics, and large appliances. Amazon witnessed more than 30% growth in No Cost EMI.

Nowadays, most platforms give you 3 options: either pay upfront full, or take an EMI at full interest, and third a no-cost EMI. But is it really no-cost? Well, that’s what we will be discussing in this article. Let’s understand is no No-cost EMI is really free.

What is “No Cost EMI”?

But before we get into the hidden charges in no-cost EMI, we need to first understand what a no-cost EMI actually is. The short answer is, no: a no-cost EMI isn’t actually free.

When you check online, no-cost EMI is defined as a type of promotional EMI in which the seller gives the customer an upfront discount on the interest part of the payment. This means that even after the bank charges interest on the discounted price, the user still pays the same amount for the goods.

For example, let’s take Agastya, who bought a ₹1.28L laptop during a sale, where he got an ₹8000 discount for it being a no-cost EMI. But when he checks his bank statement, he realizes he did pay interest. When he questioned the bank, the bank explained that the amount is divided into principal + interest internally, so he did pay ₹1.2L in total, but the bank recorded the ₹20,000 as interest.

How No-Cost EMI Really Works?

If you were wondering, is no-cost EMI interest-free? Now you know it is not. The table below explains how a no-cost EMI actually works, so you understand if there’s any processing fee in a no-cost EMI or any other charges.

There are 3 players in a no-cost EMI:

• Merchant
• Bank/NBFC
• Customer

The table below shows what happens when you select a no-cost EMi option.

Hidden Charges in No-Cost EMI

So the question is, are there any hidden costs EMI that you, as a customer, are kept unaware of in a no-cost EMI? Well, yes. There are many such hidden costs. Let’s uncover them one by one.

1. GST on Interest

The truth is, there is GST on EMI when it comes to no-cost EMI. This is because even on credit card EMIs, 18% GST is applicable, and when you book a “NO-cost EMI”, the bank still books the interest internally. So if Agastya had to pay ₹20000 in interest, the extra amount is around ₹3600

2. Processing / Conversion Fee

Banks end up charging a fee of at least ₹100 when processing a no-cost EMI, but this ₹100 is on the lower end, and it can go as high as ₹1000. An 18% GST is charged on this too, which most people won’t show to you upfront.

3. Loss of Upfront Discount

If you pay everything up front, you get a really high discount, but the discount is significantly lower when you opt for a no-cost EMI. This loss of discount is a cost borne directly by the customer.

4. Foreclosure & Cancellation Penalties

There are certain penalties if you close the EMI early; you may end up having to pay extra. Closing the EMI early on can close the discount or void any form of cashback. So, is no-cost EMI really free? The answer is anything but a yes.

5. Long Tenure Risk

You must have noticed that the interests are generally lower on a longer EMI tenure. This is because the longer you drag an EMI, the longer there’s a chance that you will default, and the bank can charge a penalty of up to 40%-50% if there’s a default.

Who Actually Pays the Interest in a No-Cost EMI?

So the single unanswered question is, who actually pays the interest? Is it you, the merchant, or some unknown third party? Well, usually, it’s the merchant who is paying the interest, but you are indirectly paying it through:

• Reduced upfront discount
• GST on internal interest
• Processing/conversion fees
• Price inflation during sales

So yes, the common misconception that the bank waives the interest is a myth; in reality, there are hidden charges in no-cost EMI that you never knew about, where the Interest gets redistributed.

Conclusion

Is no-cost EMI really free? The answer is no. You pay indirectly through a lot of other hidden charges in a no-cost EMI. This is why here at My Mudra, we always advise getting an EMI card if you’re shopping a lot, but if there are some specific items you’re shopping for, you'd better use the No-cost EMI, as it’s a much more convenient solution.

Also Read:
- How to Pay Personal Loan EMI with a Credit Card in 2025
- Missed A Personal Loan EMI – What Should You Do?