Few employers in India offer interest free loans to their employees as a benefit for working with them. Few other employers are offering low interest rates in comparison to the market rate. As per our tax laws, the value of the benefit resulting from concessional or interest free loan provided by the employer to the employee during the relevant previous year shall be considered as value of perquisite taxable in the hands of the employee.
Interest free loan will also be considered as perquisite if during the previous year;
- a loan is made available to the employee by any person on behalf of the employer.
- a loan is provided to any member of the employee’s household.
How is the value of the perquisite determined?
The value of perquisite in this case will be a sum equal to the interest computed at the rate charged per annum by the state bank of India, as on the 1st day of the relevant previous year in respect of loans for the same purpose advanced by it.
This means the perquisite value is to be determined based on the rates charged by the State Bank of India (not any other bank or financial institutions) on the April 1 of the financial year in which the employee received the loan.
Interest has to be computed on the maximum outstanding monthly balance as reduced by the interest if any actually paid by the employee or any such member of the employee’s household.
However in following cases, value of perquisite should be considered as zero / nil:
- Where the aggregate amount of loans does not exceed Rs 20,000; or
- Where the loan is for medical treatment in respect of diseases specified in rule 3A.
This means in above two cases the employee will not be paying any taxes as the value is considered as zero.
As discussed above, members of the household of the employee will also be considered if loan has been provided to any of them at free or at a concessional rate. For this purpose, members of the household shall include spouse, children and their spouses, parents, servants and dependents.
Steps to calculate value of perquisite on interest free loan
- Compute the maximum outstanding balance of loan as on the 1st day of each month
- Find out the rate of interest for the loan charged by the State Bank of India as on the 1st day of April of the previous year in which the loan has been disbursed to the employee by the employer.
- apply the interest rate on each month’s outstanding balance as found in step 1 to find out the total amount of interest charged by the State Bank of India.
- If any interest on loan has been recovered from the employee, then deduct it from the amount calculated at step 3. Balance amount remaining shall be considered as value of perquisite.
Example: How to calculate value of perquisite for interest free loans
Mr A has obtained an interest free loan of Rs 4,00,000 from XYZ ltd for purchase of car on 1.6.2018. Regular repayment of installments at the end of the month to XYZ ltd by Mr A is Rs 10,000 per month.
Computation of value of perquisite
Let us assume that on 1.4.2018, the interest rate charged by the State Bank of India for the same loan is 10% per annum.
For the month ending Maximum amount of loan outstanding
|Month||Maximum loan outstanding amount||State Bank of India – Interest @ 10%|
Interest on Rs 34,50,000 at the rate of 10% = Rs 28,750
Value of perquisite for interest free loan = Rs 28,750
If in our above case 5% per month interest on loan has been recovered from Mr A by XYZ ltd, then Rs 28,750 has to be reduced by the amount recovered at the rate of 5% per month. In this case the value of perquisite for providing loan at a concessional rate = Rs 28,750 – (Rs 34,50,000 * 5% * 1/12) = Rs 28,750 – Rs 14,375 = Rs 14,375.
Employers must ensure that TDS on salary has been deducted after taking interest free loan as a prerequisite for employees. If tax has not been deducted by the employer, the employee faces several consequences such as interest and penalty for not paying full tax. Further penalty can be levied by the income tax department if the value of the perquisite is not disclosed in income tax return.