Taxability of Interest subsidy or Interest Free loan received by an employee from his employer

Dear Employee , enjoy the perk and avoid the Tax-net also

(Whether Interest subsidy received by an employee from his employer is a taxable perquisite in his hands under the Income-Tax Act 1961)

Now-a -days most of the employers, especially the companies have been providing loans to their employees for the purpose of purchase/construction of a houses or purchase of vehicles. Such loans are either interest-free or at concessional rate of interest. These loans are being advanced in order to make the salary package more attractive as well as by way of a welfare measure. Of late, some companies have been framing different kinds of schemes for the above purpose. Under some of such schemes the employee may himself take a loan from banks or other financial institutions,. e.g. H.D.F.C. , L.I.C.- F.C., G.R.U.H – Finance etc; the employee is required to bear only a small percentage of interest between 4% to 6% and the balance of interest on such loans is reimbursed to the employee by the employer company. Such reimbursement has come to be popularly known as ‘Interest -subsidy’.

It is thus, clear that an employer may assist his employee in the purchase / construction of a house or the purchase of a vehicle, by providing:

(i) interest free loan, or

(ii) loan at concessional rate of interest, or

(iii) interest subsidy in respect of the interest payable on loan

In such cases the employee would naturally be interested to know about the tax implications in respect of such loan transactions.

Calculation of Value of Interest Free Loan or Interest subsidy

Any loan given free of interest or concessional interest shall be a taxable perquisite and calculated as follows:

• Interest calculated at the rate charged by State Bank of India as on 1st day of previous year on loan for the same purpose. This is to be calculated on maximum outstanding monthly balance.
• Less actual interest paid by employee.

Exceptions of Interest Free Loan or Interest subsidy

• Loan upto Rs. 20,000.
• Loan for medical purposes for prescribed diseases

Steps to calculate value of Perquisite of of Interest Free Loan or Interest subsidy

Step  1 : Calculate maximum outstanding monthly balance at the end of every month

Step 2 : Find out rate of interest charged by SBI as on 1st April of previous year in case of similar loan

Step 3 : Calculate interest on amount as per Step 1 @ Rate as per Step 2 for each month

Step 4 : Total of interest for the year as per Step 3

Step 5 : Less : Interest charged from employee

Step 6 : Balance amount is the value of perquisite in respect of interest free/concessional loan

Interest-free loan or Interest subsidy – Points to be noted

• Interest will be calculated according to the method given above. No other method (e.g., cost of capital / fund to employer) shall be taken into consideration.
• If a closely- held company given a loan to an employee who holds at least 10% voting power, such loan is deemed as dividend under section 2(22)(e), if a few conditions are satisfied . Even in such a case, the perquisite value of interest-free loan is chargeable to tax.
• Notional interest on interest-free security deposit given by the employer (for a flat belonging to the employee taken on lease), cannot be treated as perquisite.

Author Details-

Mr. S. K. TYAGI, M.Sc., LL.B., Advocate, Ex-Indian Revenue Service and Income-Tax Advisor

Office Address– Flat No.2, (First Floor), Gurudatta Avenue, Popular Heights Road, Koregaon Park, PUNE – 411 001, Phone Office: 0212-633012, Residence Phone -0212-682032, 0212-682444

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(Republished with Amendments by Team Taxguru)