We received several queries regarding the tax treatment of interest free loan or loan given at concessional rates of interest by an employer to an employee.
When your employer provides you or any member of your household, an interest free loan or a loan at a concessional rate – it is chargeable to tax as a perquisite. It may be specified as ‘an interest free or tax free’ loan when disbursed– however it shall be taxable as part of your salary. Let’s take a look at what is the prescribed method of calculation of the taxable value of such loan.
Taxable value of interest free loan – Note that the method prescribed below is the only way to calculate taxable value – no other method such as cost of value of funds shall apply. Also in case a closely held company gives a loan to an employee who holds 10% or more of the voting power, such loan is considered a dividend under section 2(22)(e), upon satisfaction of a few conditions. Even then, it will still be charged to tax as a perquisite based on the method given below.
Method of calculation –
- Find out aggregate outstanding balance for the loan (for all the loans if more than one) as on the last day of each month
- Find out the Interest charged by SBI as on the 1st of April (of the same year in which the loan has been given) – for a loan SBI would give for the same purpose
- Calculate interest for each month of the year on the outstanding amount in the 1st bullet at rate of Interest given in the 2nd bullet
- From the total interest as calculated above deduct interest recovered from you by the employer, if any.
- This balance amount is the taxable value of the perquisite.
Interest Free Loan provided by the employer is exempt from tax in the following 2 cases –
- If the loan has been provided for medical treatment in respect of diseases specified in rule 3A, it shall be exempt from tax. However, in this situation if an amount is received by the employee as a reimbursement under a medical insurance scheme, the exemption here shall not apply to this reimbursement and it shall be taxed as a perquisite.
- When the aggregate amount of loan disbursed to the employee is Rs 20,000 or less.
Most likely, if your employer has extended you an interest free loan, he may have already included the taxable value (as calculated above) in your Form 16 and deducted tax accordingly.