Blog

Loan provided to employees – Perquisite calculation – Part I

We find many payroll managers being unaware that loans provided to employees (by the employer) are taxable in the hands of the employees. The typical reactions (from payroll managers) we come across when we talk about taxability of loans provided to employees are as follows.

1. A loan is something that an employee repays. Where is the question of salary here? If loan is not salary, how can it be taxed?

2. We give loan under the head ‘Salary Advance’ and hence we think it is not taxable.

Loans provided to employees are taxable as per Rule 3(7)(i) of the Income Tax rules.  However, the actual tax amount on loan provided will depend on the interest rate the employee pays. According to the income tax rules, if loans are provided at a rate which is less than the interest rate charged by the State Bank of India (SBI), then the employee who receives the loan is deemed to have received the loan at a concessional interest rate. The extent of “concession” is a benefit which is taxable.

For example, if an employee receives a personal loan at the rate of 0% (interest-free loan) from the company in which he is employed, and if the interest rate charged by SBI for personal loan is, say, 15% per annum, then the interest cost “saved” by the employee (to the extent of 15% in this case) is deemed to be a perquisite which is taxable in the hands of the employee. The payroll manager should calculate the interest saving (difference between 15% and 0%) in Rupee terms and add the total interest saving for the year to the taxable salary of the employee for the purpose of taxation.

Of course, in the above example, if the company provides the personal loan at the rate of 15% or more (equal to or greater than the interest rate charged by SBI) to its employees, then as per Rule 3(7)(i) the loan cannot be deemed to be a concessional loan and consequently the perquisite value of such a loan shall be zero.

Payroll managers will do well to make note of the following:

  1. If any payment made to an employee is in the nature of loan, Rule 3(7)(i) will govern the taxability of the same. Just because the loan is called by some other name by the company, it cannot be left out from the ambit of taxation. After all, rose, called by any other name, would still smell the same.
  2. Salary advance and loan are two different things. A salary advance is compensation paid to an employee ahead whenever it falls due – for example, salary for May 13 which is typically paid on 31-May is paid on, say, 15-May. Salary advance is taxable as per the Section 17 of the Income Tax Act. However, loan taxability is governed by Rule 3(7)(i).

Let us take a look at Rule 3(7)(i) in detail and examine the conditions which govern perquisite calculation on loan provided to employees. The text of Rule 3(7)(i) is as follows.

Perquisite value of loan
Rule 3(7)(i)

The value of the benefit to the assessee resulting from the provision of interest-free or concessional loan for any purpose made available to the employee or any member of his household during the relevant previous year by the employer or any person on his behalf shall be determined as the sum equal to the interest computed at the rate charged per annum by the State Bank of India, constituted under the State Bank of India Act, 1955, as on the 1st day of the relevant previous year in respect of loans for the same purpose advanced by it on the maximum outstanding monthly balance as reduced by the interest, if any, actually paid by him or any such member of his household:

Provided that no value would be charged if such loans are made available for medical treatment in respect of diseases specified in rule 3A of these Rules or where the amount of loans are petty not exceeding in the aggregate twenty thousand rupees:

Provided further that where the benefit relates to the loans made available for medical treatment referred to above, the exemption so provided shall not apply to so much of the loan as has been reimbursed to the employee under any medical insurance scheme.

From the above, the key conditions are as follows:

  1. Loan provided by a company to any member of its employee’s household is deemed to be loan provided to employee for the purpose of taxation. “Household” in this regard includes the employee’s spouse(s), employee’s children and their spouse(s), employee’s parents and employee’s servants and dependents.
  2. For loan to be taxable, the total amount of loan given to an employee in a tax year should be more than Rs 20,000. If the loan amount provided to an employee is less than Rs 20,000 in a year, the same shall be non-taxable.
  3. Please note that if an employee receives more than one loan (with each loan amount less than Rs 20,000) in a tax year, the aggregate of all loan amounts he receives should be looked at for the purpose of taxation. If the aggregate amount is more than Rs 20,000, the loan amounts shall be taxed.
  4. If any loan is provided to an employee for the purpose of meeting his medical expenses towards the treatment of  a disease specified in rule 3A of income tax rules, such a loan shall be non-taxable. However, if an employee receives payment under any medical insurance scheme for the treatment of a disease specified in Rule 3A, the loan to that extent shall be taxable.
  5. For the purpose of loan perquisite calculation, interest rest rate charged by SBI for a similar loan as on first of April in the year in which the loan is provided to the employee should be considered. For example:
    • If the loan is provided for the purpose of buying a car, SBI’s car loan rate should be looked at as the reference rate.
    • If the loan is a personal loan, SBI’s personal loan interest rate should be considered as the reference rate.
  6. The interest rate charged by SBI as on 01-Apr should be considered as the reference rate. SBI publishes the interest rate (as on 01-Apr) each year on its website.
  7. The interest benefit to the employee (difference between the SBI interest rate and the interest rate charged by the employee’s organization) should be calculated on the “maximum outstanding balance” of the loan each month. According the income tax rules, “maximum outstanding balance” means the aggregate outstanding balance for each loan as on the last day of each month. For example, if an employee receives a loan of Rs 1 lakh and repays Rs 10,000 each month by way of deduction from his salary, the maximum outstanding balance at the end of the first month of his loan repayment schedule shall be Rs 90,000 (Rs 1,00,000 minus Rs 10,000 repaid at the end of the first month). The interest benefit should be calculated on Rs 90,000 at the end of the first month. Likewise, the interest benefit should be calculated on Rs 80,000 at the end of the second month and so on.

We will look at some illustrations on calculation of perquisite value on loan provided to employees in the next post.

Posted in: Blog

Leave a Comment (32) ↓

32 Comments

  1. Purnima April 21, 2015

    What if an employee travels onsite on official purpose and he receives his entire salary at onsite? How would we calculate the tax perquisite in this case?

    reply
    • gautham April 22, 2015

      Not sure what you mean by perquisite in your question.

      reply
  2. Venus Dmello August 19, 2015

    If I pay perquist

    If I pay perquist on my housing loan the perquist amount should be considered as housing interest and should be used for 100% deduction

    reply
    • gautham August 19, 2015

      No, perquisite on account of housing loan cannot be considered as housing loan interest.

      reply
  3. Sridhar December 16, 2015

    HI,
    if I am getting 50000 from office as a loan and interest free loan. How the tax will deduct for this amount as per Income tax law. ( under perquist)

    reply
    • gautham December 17, 2015

      We need to calculate the perquisite value as per the maximum outstanding balance method and add the perquisite value for the year to other salary income, in order to arrive at the taxable income.

      reply
  4. Ashish Parab December 17, 2015

    Have the rules changed now in 2015 in terms on interest applicability as per the Companies Act?
    What is the maximum amount and Tenure of the loan that can be given?

    reply
    • gautham December 22, 2015

      Loans and advances made by the companies to their employees, other than the managing or whole-time directors, are not governed by the requirements of section 186 of the Companies Act, 2013. The law does not specify the maximum amount or tenure of an individual loan provided to employees. However, the approval of Board of Directors/shareholders shall be required if the total loan amount as a percentage of share capital, reserves, and securities premium amount exceeds certain limits.

      reply
  5. Dhiraj Mishra January 2, 2016

    My company provide interest free marriage loans. I am planning to avail 2 lacs rupees in Feb, 2016 and will pay back in 36 installments deducted from salary.

    Could you please help me to calculate the tax I have to pay for this loan?

    reply
    • gautham January 5, 2016

      Your company should be calculating the perquisite value as per the reference loan rate published by the State Bank of India.

      reply
  6. ananya January 18, 2016

    Would advance salary provided to an employee also be construed as interest free loan ?

    reply
    • gautham January 19, 2016

      Salary advance cannot be construed as interest free loan.

      reply
  7. Surya February 12, 2016

    I came to hear that, the loan for a PSB employees get up to Rs 75 lakhs with low interest rate. Is it TRUE??

    reply
    • gautham February 12, 2016

      We have no information on this. Kindly check with PSB employees.

      reply
  8. K CHANDRASEKARAN February 27, 2016

    I have taken personal loan viz clean loan for housing purpose from my employer and claiming under IT exemption for HL purpose. Whether perquisites is to be calculated treating this as personal consumption loan even though the purpose of loan is for housing.

    Recently we availed flood relief loan in Chennai at concessional rate. If perquisite is to be calculated on this it will defeat the purpose of flood relief concessional rate.
    Pl clarify

    reply
    • gautham February 29, 2016

      I have taken personal loan viz clean loan for housing purpose from my employer and claiming under IT exemption for HL purpose. Whether perquisites is to be calculated treating this as personal consumption loan even though the purpose of loan is for housing.

      Ans: If the purpose of the loan is to construct house property, the equivalent SBI rate for housing loan should be considered for perquisite calculation.

      Recently we availed flood relief loan in Chennai at concessional rate. If perquisite is to be calculated on this it will defeat the purpose of flood relief concessional rate.

      Ans: There is no tax benefit available for flood relief loan and hence perquisite value has to be calculated on the same.

      reply
  9. sathish k May 3, 2016

    Very nice article and easy to understand.

    reply
  10. SUNIL TIWARI May 30, 2016

    My company is providing me 60 lakhs housing loan at 3.5%.
    Please guide me wrt:
    How much would be my monthly gain if the loan period is 10 years or 17 years and standard SBI rate is 9.5%.
    How much would be perquisite tax if I fall in 30% tax bracket

    Regards,
    Sunil Tiwari
    8879980631

    reply
    • gautham May 31, 2016

      Difficult to give you the exact perquisite value with the data you have provided. We will need the repayment schedule in order to calculate the perquisite value. Also, the perquisite value has nothing to do with the tax bracket you fall under.

      reply
  11. Praveen July 16, 2016

    If my salary is below taxable limit, still do i have to pay tax on such advances?
    Does the company need to charge interest on every employee.

    reply
    • gautham July 20, 2016

      We need to calculate the perquisite value for loan and then check if your income falls under a taxable bracket. A company can choose to charge interest or offer interest-free on the basis of its policies.

      reply
  12. prashant gautam October 19, 2016

    sir
    if i take loan from my cimpany and suppose i have some opportunity to go to other psu or govt job or private job will i be able to switch loan.
    suppose if my psu gives home loan at 5% and i switch to some central govt job (non psu) like general administration etc. and i want that my loan be transferred to my sbi account will this be possible. or will i have to pay all the loan amount befor leaving job??

    reply
    • gautham October 20, 2016

      Kindly check with your employer in this regard.

      reply
  13. Prasanth K March 6, 2017

    Dear Sir,
    Our Company provides 1% subsidy on housing loan interest which is taken from other financial institutions/banks, my question is that whether it will be taxable in the hands of employee? Thanks in advance

    Regards

    Prasanth

    reply
    • gautham March 6, 2017

      I presume that your organization bears housing loan interest (to the extent of 1%) on loans taken by its employees. If yes, the benefit is taxable in the hands of the employee.

      reply
  14. B.B.SANDWAR March 9, 2017

    i have taken 1200000/- salary advance.

    I have to return back in 5 years by deducting 20000/-per month.From monthly salary what will be deduction as tax?

    reply
    • gautham March 18, 2017

      The perquisite shall be the interest difference between the corresponding SBI loan rate and the interest charged by your employer. The perquisite should be added to your income and the tax should then be calculated on the total income.

      reply
  15. Manan August 2, 2017

    hello, i wanted to know, that if we give loan to our labour on monthly basis (different amounts each month, less than Rs. 20000/ year). Can we offset the loan value with the bonus at the end of year. Also if we do so will the loan attract ESI and whether interest is compulsory on such loans.
    Regards

    reply
    • gautham August 5, 2017

      The labour department may object to the practice of setting off bonus payable against loan. You could term it as “advance bonus” or something like that.

      If the ESI department deems that the monthly payment is in the nature of wage, the department may insist that ESI should calculated on the payment.

      reply
  16. shyam February 22, 2018

    Hi,

    I would like to understand that if i have taken salary advance 30 K and paid back with in one installment the entire amount, So would i eligible to deduct the perquiete

    With Regards
    Shyam

    reply
    • gautham February 22, 2018

      Salary advance should be treated as salary and taxed accordingly. There shall be no perquisite calculation on salary advance.

      reply
  17. Veerendra April 24, 2018

    Dear concern,

    Looking forward for illustration.

    Regards,
    Veerendra.

    reply

Leave a Comment