Under Section 17 of the Income-tax Act, 1961, as amended by the Finance Act, 2026, interest-free or concessional loans granted by an employer to an employee or the employee’s household members constitute taxable perquisites under the head “Salaries.” The taxability arises because such loans confer a financial advantage compared to borrowings at prevailing market rates. The perquisite value is determined by calculating interest on the monthly outstanding loan balance using the State Bank of India’s rate for similar loans as on the first day of the relevant financial year and reducing any interest actually recovered from the employee. The provision extends to loans taken by spouses, children and their spouses, parents, servants, and dependants. However, loans with an aggregate value not exceeding ₹20,000 are exempt. Similarly, loans for treatment of specified diseases such as cancer, tuberculosis, AIDS, and other serious ailments are exempt, except to the extent reimbursed by an insurance company, which becomes taxable thereafter.
Taxability of perquisite in the form of concessional or interest-free loan
An assessee can apply to the Assessing Officer to issue a nil or lower TDS certificate. Such certificate is issued if the estimated tax liability of the assessee justifies no deduction of tax or deduction of tax at a lower rate.
Introduction
Where an employer provides an interest-free or concessional loan to an employee or any member of their household, the value of such loan facility is taxable as a perquisite under section 17.
When does a perquisite arise?
A perquisite arises when employers extend a loan facility to their employees for personal purposes such as education, medical treatment, marriage, etc.These loans are generally free or at a concessional rate of interest and are recovered from the salary of employees by way of deductions from salary over a period of time.
Employees taking interest-free loans or loans at concessional rates from the employer are at advantage over employees who obtain loans from the banks at market rates. Thus, to avoid any discrimination, the value of such interest-free loans or concessional loans is taxable as perquisite in the hands of employees.
The taxability shall arise if the loan is taken by the employee himself orany member of his household. Member of household includes—
(a) Spouse,
(b) Children and their spouses,
(c) Parents, and
(d) Servants and dependants.
How to calculate the value of the perquisite?
The taxable value in the hands of the employee shall be calculated as follows:
Step 1: Calculate the outstanding balance of each loan taken from the employer as of the last day of each month.
Step 2: Calculate interest on the amount computed in Step 1 at the rate of interest declared by the State Bank of India on the first day of the relevant financial year in respect of similar loans.
Step 3: Reduce the interest computed in Step 2 by any interest recovered from the employee.
Step 4: The resulting figure shall be the taxable perquisite.
When interest-free loans or concessional loans aren’t taxable as perquisites?
Loan up to Rs. 20,000
Interest-free loans or concessional rate loans taken from the employer up to Rs. 20,000 are not taxable in the hands of employees as perquisite. If the original loan was above the threshold limit but subsequently it is reduced below 20,000, it shall not be considered a petty loan. The interest on such a loan, even if it falls below 20,000, shall be calculated in accordance with the method prescribed above.
If an employee receives more than one loan (with each loan amount of less than 20,000), the aggregate of all loans should be considered to decide if it’s a petty loan or taxable. If an employee takes a loan in multiple trenches which in the aggregate exceeds 20,000, the entire amount shall be considered for computation of tax.
Loan for medical treatment
Any loan taken as interest-free or at a concessional rate from the employer for the medical treatment of diseases specified in approved hospitals is not taxable as perquisite.
However, this exemption will not be available in respect of loan that has been reimbursed to the employee by an insurance company under any medical insurance scheme.
Where medical insurance reimbursement is received, the taxable value shall be calculated on the amount reimbursed by the Insurance co. but not repaid against the outstanding loan. The value of the perquisite shall be calculated from the date of reimbursement.
For example, if an employee takes a loan of Rs. 2 lakhs for medical treatment, but later gets insurance money of Rs. 50,000 in respect of such treatment, the exemption will be available only in respect of Rs. 1.5 lacs. The taxable value will be computed at the prescribed rates for the balance amount of Rs. 50,000.
List of specified diseases for the purpose of medical treatment are:
a) Cancer
b) Tuberculosis
c) AIDS
d) Disease or ailment of the heart, blood, lymph glands, bone marrow, respiratory system, central nervous system, urinary system, liver, gall bladder, digestive system, endocrine glands or the skin, requiring surgical operation;
e) Ailment or disease of the eye, ear, nose or throat, requiring surgical operation
f) Fracture in any part of the skeletal system or dislocation of vertebrae requiring surgical operation or orthopedic treatment
g) Gynaecological or obstetric ailment or disease requiring surgical operation, caesarean operation or laperoscopic intervention
h) Ailment or disease of the organs mentioned at (d), requiring medical treatment in a hospital for at least three continuous days
i) Gynaecological or obstetric ailment or disease requiring medical treatment in a hospital for at least three continuous days
j) Burn injuries requiring medical treatment in a hospital for at least three continuous days
k) Mental disorder – neurotic or psychotic – requiring medical treatment in a hospital for at least three continuous days;
l) Drug addiction requiring medical treatment in a hospital for at least seven continuous days;
m) Anaphylectic shocks including insulin shocks, drug reactions and other allergic manifestations requiring medical treatment in a hospital for at least three continuous days.
MCQs on Taxability of perquisite in the form of a concessional or interest-free loan
Q1. Mr. A, an employee of ABC Ltd. obtains an interest-free loan of Rs. 19,000 for the renovation of his house from ABC Ltd. Whether the interest on such loan will be taxable in the hands of Mr. A?
(a) Yes, as the loan is obtained interest-free from the employer
(b) No, as the loan amount is less than Rs. 20,000
(c) No, as the loan is taken for the renovation of his house
(d) None of the above
Correct answer: (b)
Justification for the correct answer: Where an employer provides an interest-free or concessional loan to an employee or any member of their household, the value of such loan facility is taxable as a perquisite. However, loans up to Rs. 20,000 and loans for medical treatment are exempt from tax.
Q2. Mr. X, an employee of XYZ Ltd. obtains a loan at a concessional rate of Rs. 55,000 for the medical treatment of his wife for the treatment of cancer from XYZ Ltd. Whether the loan obtained is taxable in the hands of Mr. X?
(a) Yes, as the loan is obtained from the employer
(b) Yes, as the loan amount exceeds Rs. 20,000
(c) No, as the loan is taken for the treatment of a specified disease
(d) None of the above
Correct answer: (c)
Justification for the correct answer: Where an employer provides an interest-free or concessional loan to an employee or any member of their household, the value of such loan facility is taxable as a perquisite. However, loans up to Rs. 20,000 and loans for medical treatment of disease specified under Rule 3A are exempt from tax.
Q3: Any interest-free or concessional Loan taken by an employee from the employer is taxable _________ if the loan amount exceeds the specified limit.
(a) Under the head Salaries as “perquisites”
(b) Under the head House property
(c) Under the head Other Sources
(d) Under the head Capital Gains
Correct answer: (a)
Justification for the correct answer: Where an employer provides an interest-free or concessional loan to an employee or any member of their household, the value of such loan facility is taxable as a perquisite.
Q4. Where an employer provides an interest-free or concessional loan to an employee or any member of their household, the value of such loan facility is taxable as a perquisite. Who is considered “any member of their household”?
(a) Spouse and children
(b) Spouse of their children
(c) Parents and Dependents
(d) All of the above
Correct answer: (d)
Justification for the correct answer: The taxability shall arise if the loan is taken by the employee himself or his spouse, his children and their spouse, his parents or his servants and dependents.
Q5. While computing the value of perquisite, rate of interest declared by the __________ on the __________in respect of similar loans shall be taken.
(a) State Bank of India, first day of the relevant financial year
(b) State Bank of India, last day of the relevant financial year
(c) State Bank of India, first day of the month in which loan was taken
(d) State Bank of India, last day of the month in which loan was taken
Correct answer: (a)
Justification for the correct answer: While computing the value of perquisite, rate of interest declared by the State Bank of India on the first day of the relevant financial year in respect of similar loans shall be taken.
Q6. Mr. P took a loan of Rs. 5,00,000 from his employer for treatment of a specified disease of his daughter. However, Rs. 1,00,000 was reimbursed by the insurance company to Mr. P. The taxable value for the purpose of computing perquisite will be ________.
(a) 5,00,000
(b) 1,00,000
(c) 4,00,000
(d) None of the above
Correct answer: (c)
Justification for the correct answer: Any loan taken as interest-free or at a concessional rate from the employer for the medical treatment of specified diseases (i.e., cancer, tuberculosis, AIDS, etc.) in approved hospitals is not taxable as perquisite.
However, this exemption will not be available in respect of a loan that has been reimbursed to the employee by an insurance company under any medical insurance scheme.
Above document contains the provisions of the Income-tax Act, 1961, as amended by the Finance Act, 2026.
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(Republished with amendments)
If an employer is recovering the amount fully in a financial year , where is the question of additional income in terms of Perquisites.