Incometax calculation for Concessional or interest-free loans given by an employer

Updated: As per the amended finance act 2020

Interest-free loan or loan at a concessional rate of interest given by an employer to the employee (or any member of his household) is a perquisite chargeable to tax in the hands of the concerned employee under section 17(2)(viii) read with Rule 3(7)(i) of Income Tax act.

According to I-T Act rules, a perquisite value is based on the rate of interest charged by the State Bank of India (SBI) on April 1 of the financial year in which the employee received the loan. The tax on perquisites is deductible at source (TDS) on the salary received by the employee.

However, nothing is taxable if:

 i)  Loan in an aggregate does not exceed Rupees twenty thousand.

ii) Loan is provided for treatment of specified diseases (Rule 3A) like neurological diseases, Cancer, AIDS, Chronic renal failure, and Hemophilia (specified diseases). However, the exemption is not applicable to so much of the loan as has been reimbursed to the employee under any medical insurance scheme.

Calculation of perquisite chargeable to tax:

Step 1: Find out the maximum outstanding monthly balance of the loan(s) on the last day of each month. (i.e. the aggregate outstanding balance for each loan as of the last day of each month)

Step 2: Find out the interest charged by the State Bank of India (SBI) as of the first day of the relevant previous year* in respect of the loan for the same purpose advanced by it; [For the purpose of computing perquisite valuation, you will get the interest rate from SBI website on various loans in Personal Segment advances as on April 1, of the financial year in which loan was availed]

Step 3: Calculate the interest applicable to the loan amount for each month (mentioned in point 1) at the rate charged by the State Bank of  India as mentioned in step 2.

Step 4: Find out what Interest actually recovered, if any, from the employee

Step 5:  The remaining balance (Step3-step4) is the taxable amount as ‘perquisite’.

*Previous year is a period in respect of which a person has to pay tax. In the income tax act, the previous year is a period of 12 months beginning from April 1 to March 31. The assessment year is a 12 months period following the previous year during which the assessee has to file his return of income.

Source: Income Tax department

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