Tax-Free Loans from Employer: How the Rules Have Changed?

Your employer offers you a loan at 4% per annum. The bank would charge you 12%. Sounds like a great deal. But is the entire benefit tax-free?

Not necessarily. The rules around this have changed significantly with the Income Tax Act, 2025, applicable from financial year 2026-27 (April 1, 2026 onwards).

In this post, let us look at how employer loans are taxed, what the old law said, and what has changed.

How Are Employer Loans Taxed?

A perquisite is any benefit or amenity provided by the employer beyond the regular salary. An interest-free or concessional loan from your employer is one such perquisite.

Under Section 17(2) of the Income Tax Act, 1961 (or Section 17(2) of the Income Tax Act, 2025), the benefit you receive from a below-market (interest rate) loan is treated as part of your salary income.

How is this computed?

Essentially, it is the difference between the SBI lending rate and the rate your employer actually charges. The SBI rate on April 1 of the year is the benchmark.

Interest is calculated on the outstanding loan balance at the end of each month.

So if SBI charges 10% and your employer charges 4%, the 6% difference on the outstanding balance gets added to your taxable income.

As I understand, this computation method remains unchanged under the new Income Tax law.

But there is a change in exemption threshold and favourably so.

What Was the Old Rule? (Income Tax Act, 1961)

Under Rule 3(7)(i) of the Income Tax Rules, 1962, two categories of employer loans escaped the perquisite tax:

1. Small (petty) loans: where the *aggregate outstanding balance did not exceed Rs. 20,000.
2. Medical treatment loans: loans for specified diseases such as cancer, tuberculosis, AIDS, and certain heart conditions, treated in approved hospitals. This list of ailments is specified in Rule 18 of Income Tax Act, 2025. There is no cap on the exemption amount. Hence, even if the employer provides a loan of Rs 20 lacs at a concessional rate to the employee, the interest difference won’t be treated as a perquisite. However, if any portion of the treatment cost is later reimbursed under medical insurance scheme, such portion of cost, as reimbursed, shall not be eligible for this benefit.

You borrowed Rs. 5 lacs from your employer at 4% p.a. rate. SBI interest rate is 10% p.a. Since the loan amount is more than 20,000, the interest difference will be treated as perquisite.

Note: Interest differential on the entire amount (and not just the excess) would be taxable. For instance, interest difference on the entire Rs 5 lacs (and not Rs 4.8 lacs) is taxable.

So, let’s say the loan outstanding did not change over the entire year. In that case, the interest difference on Rs 5 lacs would be added to your income and attract tax at slab rate. Rs 5 lacs X (10%-4%) = Rs 5 lacs x 6% = Rs 30,000

Rs 20,000 is NOT a big loan amount, and that’s what the New Income Tax Act intends to change.

What Does the New Law Say? (Income Tax Act, 2025)

The Income Tax Act, 2025, read with Rule 15(5)(a) Table IV of the Income Tax Rules, 2026 (effective April 1, 2026), has raised this threshold meaningfully.

The key change: the small loan exemption has been increased from Rs. 20,000 to Rs. 2 lacs.

If the aggregate outstanding loan balance does not exceed Rs. 2 lacs, no perquisite value is assigned at all.

The medical treatment loan exemption continues as well.

Old vs New: A Quick Comparison 

Illustration

On April 1, 2026, your outstanding employer loans are:

• Personal loan: Rs. 1,50,000 at 4% interest
• Car advance: Rs. 40,000 at 6% interest

Aggregate outstanding: Rs. 1,90,000.

Under the old law, the entire Rs. 1.9 lacs would attract perquisite tax since it crossed Rs. 20,000. Under the new law, since Rs. 1.9 lacs is less than Rs. 2 lacs threshold, no perquisite is computed. You pay zero tax on this benefit.

However, if your outstanding were Rs. 2,50,000, the full Rs. 2,50,000 would be taxable. The exemption is binary. All or nothing. There is no partial relief.

What About the New Tax Regime?

Good news here. The Rs. 2,00,000 threshold is not an exemption that you claim. It is a valuation rule. It determines whether a perquisite exists in the first place.

If your outstanding loan is below Rs. 2,00,000, no perquisite value is computed under Rule 15 (Income Tax Act, 2025). Nothing gets added to your salary. Hence the question of old regime versus new regime simply does not arise. There is no income to tax.

This is different from exemptions like HRA or LTA, which are specifically disallowed under the new regime. The loan threshold applies one step earlier. At the point of determining whether any taxable benefit exists at all.

Hence, the Rs. 2,00,000 benefit applies to you regardless of whether you are in the old or new tax regime. That is a meaningful distinction worth knowing.

For loans above Rs. 2,00,000, a perquisite value is computed and added to salary. That income is taxable under both regimes.

What Should You Do?

Everything else being the same, a small employer loan up to Rs. 2 lacs is now more attractive than before, from a tax perspective. Under the old law, even a Rs. 25,000 loan or salary advance could technically attract perquisite tax. That concern is gone.

If your employer offers salary advances or personal loans, check your aggregate outstanding balance. Keep it below Rs. 2 lacs and there is no tax cost at all, irrespective of the tax regime (new or old).

What is your experience with employer loans? Let us know in the comments section.

Disclaimer: I am not a tax expert. Please consult a chartered accountant before acting on any information in this post.