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Banks or other organizations in India offer their employees interest free loans or credit at concessional rate of interest. This concessional low rate of interest is taxable to the employees as perquisite. In this article we will discuss taxability on loan with a concessional rate of interest.
As a part of employee welfare, employers give loans, which are interest free, or at a concessional rate of interest. If an employee receives interest free loan credit at a concessional rate of interest from his employer in India, then it is considered as a non-monetary benefit received by the employee and is taxable as perquisite. Following steps are followed to arrive at the taxable value of the loans to employee or benefit received:
- Calculate maximum outstanding monthly balance.
- Find the rate of interest declared by State Bank of India on a loan given for a similar purpose. Interest rate used for calculations, should be the rate of interest as of 1st April; i.e. first day of the previous financial year. (Rate as on 1st April 2014 for the previous year 2014-15)
- Calculate monthly interest on the outstanding amount of preceding year with the rate of interest derived from step 2 above.
- From total of interest calculated, deduct interest recovered from the employee, if any.
- The balance amount is taxable as perquisite.
In the two situations mentioned below, interest free loan or loan at concessional rate from the employer is not treated as perquisite.
- Loan is given for medical treatment, where the disease is a “Specified Disease” mentioned in Rule 3A of Income Tax Rules.
- If the total amount of loan is below Rs.20, 000/-.