Getting interest-free loans from employers is not an unusual thing. Lots of companies around the world extend interest-free or concessional loans to their employees. However, it is usually not known that such types of loans are chargeable to tax as a perquisite. In its recent ruling, the Income Tax Appellate Tribunal (ITAT) has said that interest-free loans provided by employers are taxable in the hands of employees as a perquisite. However, the valuation cannot be done in an ad-hoc manner and the specific manner laid under the Income Tax Act is to be followed.
In a recent case, an assessee Neha Saraf (employee) had obtained an interest-free loan from, Teej Impex, her employer. During her income assessment for FY 2010-11, the I-T official estimated 15% interest on the loan as a perquisite value of the interest-free loan. Consequently, a sum of Rs 43.8 lakh was added to her income. Further, her argument that no employer-employee relationship existed in that year also did not sustain because the company had deducted TDS on the salary of Rs 24 lakh paid to her.
Thereafter, the CIT (Appeals) held that treatment of the value of interest-free loan had been rightly done by the the I-T official. Further, he rejected the assessee’s contention that interest on the loan had already been disallowed in the hands of the company, so it cannot be treated as a perquisite in her hands. “However, the CIT (Appeals) stated the fact that the valuation done by I-T official was not correct as it cannot be done in an ad-hoc manner and the specific manner laid under IT Act is to be followed. Therefore, the CIT (Appeals) revalued the loan in the specific manner and arrived at a lower perquisite value of Rs 20.65 lakh. Later, the issue finally reached the bench of ITAT and the ITAT upheld the order of the CIT (Appeals),” says CA Abhishek Soni, Founder, tax2win.in.
Taxability of Interest-Free Loans from Employer
The method laid under the I-T Act,1961, governing the taxability of Interest- Free Loans from employer is as under :
Step 1: Compute the maximum outstanding balance as on the last day of each month.
Step 2: Consider the interest rate charged by SBI as on the 1st of April of the year in which the loan has been disbursed.
Step 3: Calculate interest amount for every month in respect of the outstanding balance mentioned in Step 1 at the rate of interest considered in Step 2.
Step 4: Now, from the value determined under Step 3, deduct actual interest recovered from the employee, if any.
Step 5: Finally, the balance amount shall be the taxable value of the perquisite.
However, in two conditions value of such loan shall be exempt:
# If the loan has been provided for medical treatment in respect of specified diseases provided no reimbursement is received under a medical insurance scheme.
# If the total amount of loan provided to the employee is Rs 20,000 or less in a year.
What should you do?
It is to be noted that “the employee who receives such a loan must ensure that his employer deducts TDS on the total salary income, including the perquisite value of such loan. The reason being that if TDS is not deducted, then the employee has not only to pay income tax on the perquisite value of the loan, but interest will also be payable,” says Soni.