Salary

Concessional loan by the employer to employees is taxable

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Introduction

Employers sometimes provide loan facility to the employees so that they can meet their fund needs required for higher education, medical treatment, marriage, car, housing, personal purposes, etc. To support their employees, employers often provide these loans either at zero interest or at concessional rate of interest and recover the payments from the salary of employees by way of deduction from salary over a period of time.

This serves dual purposes for employers. Firstly, employees feel less burdened of interest cost and rate their employers high on goodwill. Second, employees continue with the same employer for decades at least till loan remains outstanding and they do not want to indulge in loan takeover from other agencies.

From a taxation standpoint, employees are benefited in terms of an interest-free loan or savings in interest amount which they otherwise had to pay had the loan was taken from outside and hence such benefit is considered as a taxable benefit and popularly categorised under perquisites.

Employees taking interest-free loan or loan at concessional rates from the employer are at advantage against employees who obtain loans from the banks at market rates. Thus, to avoid any discrimination the value of such interest-free loan or concessional loan is taxable as perquisite in the hands of employees. On the other hand, employers are required to deduct TDS on this as income from salary.

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.

Computation of taxable value

It is important to identify the purpose of loan taken from the employer on the basis of which the taxable value is computed. The taxable value in the hands of the employee shall be calculated as under:

Step 1: Calculate the outstanding balance of each loan taken from the employer as on the last day of each month.

Step 2: Calculate interest on such amount computed in Step 1 at the rate of interest as charged by State Bank of India on the first day of the relevant financial year in respect of similar loan [Rate of Interest charged by SBI on Education Loan, Vehicle Loan, Home Loan or Personal Loan]

Step 3: Interest computed in Step 2 shall be reduced by interest, if any, recovered from the employee.

Step 4: The resultant figure shall be the taxable value in the hands of the employee as perquisite.

This amount shall be added into the salary income of the employee and the tax shall then be calculated based on the total salary income.

Hint for tax planning: If the loan is repaid before the last day of the month the taxable value for that month is zero as the interest is computed on the balance outstanding on the last day of each month.

Loan to the shareholder of a company

If a private company gives a loan to an employee who holds at least 10% shareholding in such company, such loan may be deemed as dividend and company shall be liable to pay dividend distribution tax at the rate of 30% on such amount plus Surcharge and Health & Education Cess. Such dividend is, however, exempt from tax in the hands of the employee. Even if the loan (deemed as a dividend) is exempt from tax in the hands of the shareholder-cum-employee, the interest shall be computed as per above-mentioned mechanism and it will be taxable in the hands of such shareholder-employee.

When loan by the employer is not a taxable perquisite?

There are certain situations when extended loans are not taxable as perquisites. Nothing is taxable in the hands of employees in the following specified circumstances:

1. Petty loans are exempt

Petty loans have been exempted. Nothing is taxable in the hands of employees if the amount of loan to the employees is up to Rs. 20,000 in aggregate. If the original loan was above the threshold limit but it is subsequently reduced below Rs. 20,000, it shall not be considered as petty loan and no taxable benefit value needs to be computed.

If an employee receives more than one loan (with each loan amount of less than Rs 20,000), the aggregate of all loan he receives should be considered to decide if it is a petty loan. If an employee takes a loan in multiple trenches which in the aggregate exceeds Rs 20,000, the entire amount shall be considered for computation of tax.

2. Loan for medical treatment

Any borrowings from the employer for the medical treatment of specified diseases (cancer, tuberculosis, AIDS, etc.) in approved hospitals is not taxable. However, this exemption will not be available to so much of the loan as 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 from the date of reimbursement, on the amount reimbursed but not repaid against the outstanding loan.

Illustration, An employee takes a loan of Rs. 5 lakh for medical treatment, but later gets insurance money of Rs. 3 lakh in respect of such treatment, the exemption will be available only in respect of Rs. 2 lakh. The taxable value will be computed at the prescribed rates for the balance amount of Rs. 3 lakh.

What are the specified diseases for which tax-free loans can be obtained?

  1. Cancer;
  2. Tuberculosis;
  3. AIDS;
  4. 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;
  5. Ailment or disease of the eye, ear, nose or throat, requiring surgical operation;
  6. Fracture in any part of the skeletal system or dislocation of vertebrae requiring the surgical operation or orthopaedic treatment;
  7. Gynaecological or obstetric ailment or disease requiring a surgical operation, caesarean operation or laparoscopic intervention;
  8. Ailment or disease of the organs mentioned at (d), requiring medical treatment in a hospital for at least three continuous days;
  9. Gynaecological or obstetric ailment or disease requiring medical treatment in a hospital for at least three continuous days;
  10. Burn injuries requiring medical treatment in a hospital for at least three continuous days;
  11. Mental disorder – neurotic or psychotic – requiring medical treatment in a hospital for at least three continuous days;
  12. Drug addiction requiring medical treatment in a hospital for at least seven continuous days;
  13. Anaphylactic shocks including insulin shocks, drug reactions and other allergic manifestations requiring medical treatment in a hospital for at least three continuous days.

Frequently Asked Questions

Whether loan taken from the employer for the education of children is a taxable perquisite?

If an employee takes interest-free loan or loan at concessional rates from the employer for the education of his children, the benefit obtained by the employee by taking the concessional loan is taxable as perquisite. The benefit of such perquisite is calculated on the basis of the rate of interest charged by the SBI on April 1 of the relevant financial year in which such loan was obtained.

Whether any taxable perquisite arises if two loans of Rs. 12,500 and Rs. 7,500 is taken from the employer?

Petty loans are exempt from this provision. However, if an employee receives more than one loan and aggregate of all such loan exceeds Rs 20,000, the total loan shall not be considered as a petty loan. Thus, taxable perquisite shall be calculated in such case as per the mechanism defined above.

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