Pay More Tax if You Have Taken a Loan from Employer at Zero or Concessional Interest Rate

Have you taken a loan from your employer at a concessional rate of interest?

As I understand, such arrangements are quite common for bank employees. The banks offer loans at a concessional rate to their employees. This could result in significant interest savings for the employees, especially for long tenure loans.

However, as per the Income tax laws, the interest savings due to a lower (concessional) rate of interest by the employer is considered a perquisite, added to your income, and taxed at your slab rate.

What Is a Perquisite?

A perquisite is a benefit, in addition to the salary, provided by the employer to the employee based on his/her job designation.

Common examples of perquisite include employer provided accommodation, employer contribution to EPF/NPS/superannuation fund, loan at a concessional interest rate etc.

Since such benefits can be considered a mode of compensation, it is fair to tax the monetary value of such benefits in the hands of the employee.

Yes, there are certain exceptions and thresholds beyond which the taxes kick in. For instance, the employer contribution to EPF, NPS, and superannuation fund of the employee is exempt from tax until the annual contribution exceeds Rs 7.5 lacs.

Section 17(2) of the Income Tax Act provides the definition of “Perquisite”, and a perquisite includes, as per sub-clause 2(iii),

the value of any benefit or amenity granted or provided free of cost or at concessional rate in any of the following cases—

(a) by a company to an employee who is a director thereof;

(b) by a company to an employee being a person who has a substantial interest in the company;

(c) by any employer (including a company) to an employee to whom the provisions of paragraphs (a) and (b) of this sub-clause do not apply and whose income under the head “Salaries” (whether due from, or paid or allowed by, one or more employers), exclusive of the value of all benefits or amenities not provided for by way of monetary payment, exceeds fifty thousand rupees:

How to Calculate the Value of Concessional Rate of Interest?

This mode of calculation is defined in Rule 3(7) of the Income Tax Act.

  1. Consider the outstanding loan amount as on the last day of each month.
  2. Find the loan interest rate for such a loan by the State Bank of India. As on April 1 of the relevant (previous) financial year.
  3. Calculate interest cost for each month based on information in (1) and (2). Add up the numbers for the year.
  4. Calculate the interest actually paid by the employee on the loan.
  5. The difference between (3) and (4) is the value of the perquisite.

Sounds complex, right? Well, it is complex. However, as an employee, it is not your headache because it is the responsibility of the employer to deduct TDS accordingly.

An Illustration of Calculation of Perquisite Due to Concessional Interest Rate

Let us say you have taken a home loan of Rs 30 lacs. Tenure is 10 years.

Your employer has given you a concessional rate of 7% p.a. However, the State Bank of India is offering home loan at 10% p.a. as on the first day of the relevant financial year (April 1).

I am not sure how to find out the applicable loan interest rate for you. Clearly, SBI does not offer home loans to everyone at the same rate of interest. Depends on multiple factors. At least the Income Tax rule 3(7) makes no mention of it.

Your EMI shall be Rs 34,833.

MonthMonthLoan O/S at month startEMIInterest PaymentPrincipal RepaymentLoan O/S at month endInterest at 10%Perquisite
Total Value of Perquisite for the financial year   87,084

Now, this Rs 87,904 is your savings because of the concessional interest rate and shall be added to your income and taxed at your slab rate.

Are There Any Exceptions?

  1. If the loan amount (or the aggregate of such loans) does not exceed Rs 20,000, then such a loan (interest saving on the loan) is not taxable.
  2. If the loan is taken for treatment of any disease listed in Rule 3A of the Income Tax Act (includes cancer, Tuberculosis, AIDS and many more), then the loan (the interest saving from such a loan) is exempt from taxes. However, if the cost of such treatment is reimbursed to the employee under any health insurance scheme, then the tax exemption will not apply.

These exceptions are provided in Rule 3(7)(i) of the Income Tax Act.

Note: If the employer reimburses the cost of such medical treatment (instead of giving a loan), then such reimbursement shall also be considered a perquisite and taxed accordingly.

Are You Getting a Bad Deal?

Do not start believing you are getting a raw deal because of taxes. Taxes only reduce the benefit.

In the illustration considered, your interest saving for the year is Rs 87,084.

At 30% marginal tax rate, this will add up to 30% * 87,084 = Rs 26,125

You still save Rs 87,084 – Rs 26,125 = Rs 60,958

Hence, be happy if your employer offers loans at concessional rate of interest.

Disclaimer: I am not a tax expert, and my interpretation of the Income tax rules may be incorrect. You are advised to consult a Chartered Accountant before you act on the information shared above.

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