Taxable value of an interest-free or concessional loan from the employer (as set, 1961 Act, AY 2018-19)

Where the charge comes from

The Act lists as a perquisite the value of any other fringe benefit or amenity that the Rules prescribe (section 17(2)(viii)). A loan given by the employer free of interest, or at a rate below the market, is one of the benefits so prescribed, and its value is fixed by the Income-tax Rules, 1962, rule 3(7)(i) (as substituted by the Income-tax (13th Amendment) Rules, 2009, in force from assessment year 2010-11). Unlike the benefits of section 17(2)(iii), it is taxable for every employee, not only for a director of the employer-company, an employee with a substantial interest in it, or an employee whose salary exceeds ₹50,000 (section 17(2)(iii)(a)-(c)).

How the value is worked out

1. The loan may be given to the employee or to a member of his household, by the employer or by any person on the employer's behalf.
2. Interest is worked out at the rate that the State Bank of India charged, on the first day of the previous year (1 April 2017 for assessment year 2018-19), on a loan of the same kind (housing, car, education and so on).
3. That interest is applied to the maximum outstanding monthly balance, which the rule's Explanation takes as the amount of each loan still owed at the close of every month (Income-tax Rules, 1962, rule 3(7)(i), and Explanation (vii) to rule 3).
4. Interest paid by the employee or by any member of his household is deducted: rule 3(7)(i) of the Income-tax Rules, 1962 states that the interest at the State Bank of India rate is taken "as reduced by the interest, if any, actually paid by him or any such member of his household". Only the balance is the taxable perquisite.

Loans left out

• Petty loans whose amount, in the aggregate, does not exceed ₹20,000 (proviso to rule 3(7)(i)).
• Loans for the medical treatment of the diseases listed in rule 3A, except for any part of such a loan that a medical insurance scheme has repaid to the employee (second proviso to rule 3(7)(i)).

Example

An employer lends ₹4,00,000 for a car, and the whole amount is outstanding throughout 2017-18. The employee pays interest at 5% (₹20,000). If the State Bank of India's car-loan rate on 1 April 2017 was 9%, interest at that rate is ₹36,000, and the taxable perquisite is ₹36,000 − ₹20,000 = ₹16,000.