Did you know interest free loan to employees is not tax free?

Certain employers in India offers low interest or interest free loans to their employees as a benefit. 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.

It will also be considered as perquisite if during the previous year;

  • loan is made available to the employee by any person on behalf of the employer.
  • loan is provided to any member of the employee’s household.

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 perquisite value is to be determined based on the rates charged by SBI (not any other bank or financial institutions) on the April 1 of the financial year in which 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 him or any such member of his 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.

As discussed above, members of the household of the employee will also be considered if loan has been provided to anyone of them at free or at a concessional rate. For this purpose, member of household shall include spouse, children and their spouses, parents, servants and dependents.

Steps to calculate value of perquisite on concessional or interest free loan

  1. Compute the maximum outstanding balance of loan as on the 1st day of each month
  2. Find out the rate of interest for the loan charged by SBI as on the 1st of April of the year in which the loan has been disbursed to the employee by the employer.
  3. 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 SBI.
  4. If any interest recovered from employee, deduct it from the amount calculated at step 3. Balance amount remaining shall be considered as value of perquisite.

Example showing computation of value of perquisite

Mr A has obtained 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 interest rate charged by SBI for the same loan is 10% per annum.

For the month ending   Maximum amount of loan outstanding

MonthMaximum loan outstanding amountSBI – Interest @ 10%
Jun-183,90,0003,250
Jul-183,80,0003,167
Aug-183,70,0003,083
Sep-183,60,0003,000
Oct-183,50,0002,917
Nov-183,40,0002,833
Dec-183,30,0002,750
Jan-193,20,0002,667
Feb-193,10,0002,583
Mar-193,00,0002,500
Total34,50,00028,750

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.

Employer must ensure that TDS on salary has been deducted after taking interest free loan as perquisite for employees. If no TDS amount has been deducted, employee faces several consequences such as interest and penalty for not paying full tax. Further penalty can be levied by income tax department if the value of perquisite not disclosed in income tax return.

is a fellow member of the Institute of Chartered Accountants of India. He lives in Bhubaneswar, India. He writes about personal finance, income tax, goods and services tax (GST), company law and other topics on finance. Follow him on facebook or instagram or twitter.