Taxability Of Interest Free Loans

The

Income Tax Appellate Tribunal (ITAT) has pronounced the judgment that interest-free loans offered by the employer will be taxed on the employee as a perquisite. In this article, we discuss the concept of the Taxability Of Interest Free Loans and the implications on a salaried taxpayer.

Perquisites

Perquisite is a benefit accorded to the employee with respect to the available job designation and will be added to the head Salaries during the filing of income tax returns. A perquisite may be provided in cash or in kind. The income-tax rule specifies that perquisites can only be taxed on the existence of a legal origin.

Types of Perquisites

Since we now have a brief idea on what a perquisite is, let us now examine its types:

Taxable Perquisite – Perquisites such as rent-free accommodation, supply of gas, water and electricity, professional tax of employee, reimbursement of medical expenses and consideration remitted to the employers’ servant are taxable. On the other hand, taxable perquisites are also inclusive of any other fringe benefits provided by the employer.
Exempted Perquisites – Exempted, or non-taxable perquisites; could include the likes of travel allowance, laptops or other devices provided by the employer, refreshment provided during work-hours, medical aid, etc.
Taxable only by Employees – Certain perquisites like service of a domestic servant, an education facility for children; and so on can only be taxed by employees.

Interest Free Loan is Perquisite

Income tax rules specify that, in general, the employer is mandated to treat an interest-free loan as a taxable perquisite, which would, therefore, mean that

Tax Deduction at Source (TDS) will be applicable on the salaries received by an employee. However, exemptions are granted for loans availed with respect to the medical treatment of specific diseases, or when the loan amount is within the specified exemption limit of Rs 20,000.

Computation of Taxable Benefit

The directive of the Tribunal includes a statement which conveys that the valuation of the taxable benefit or perquisite has to be computed in accordance with the prescribed formula under the Income Tax Act, and not in an ad-hoc basis.

Responsibility of Employee and Employer

As per the

Income Tax Act, the responsibility to perform tax deductions might be vested with the employer, but the implication of the relevant legal provisions should not be interpreted to mean that employees are devoid of any responsibilities. It is the employees’ responsibility to ascertain that the employer duly deducts tax from source, which is inclusive of the perquisite value of interest-free loans. If an employee fails to fulfil this responsibility, the employee would be held liable to face the necessary consequences. On any lapse on this regard, the employee will be incurred with interests for delayed payment of advance tax, in addition to the income-tax which is payable on the perquisite value of the loan. Moreover, if the employee fails to report the value of perquisite in the income tax returns, the employee will be imposed with a penalty that could range anywhere between 50% to 200% of the tax payable on the under-reported income.

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Frequently Asked Questions

Common questions about Taxability of Interest Free Loans as Perquisites.

A perquisite is a benefit accorded to an employee with respect to their job designation, which is added to the 'Salaries' head during the filing of income tax returns. It can be provided in cash or in kind, and can only be taxed if it has a legal origin.

The two main types of perquisites are taxable perquisites (e.g., rent-free accommodation, reimbursement of medical expenses) and exempted or non-taxable perquisites (e.g., travel allowance, laptops provided by the employer). There are also certain perquisites that are taxable only for employees (e.g., service of a domestic servant, education facility for children).

According to income tax rules, an interest-free loan provided by an employer is generally treated as a taxable perquisite, which means that Tax Deduction at Source (TDS) will be applicable on the salaries received by the employee.

The taxable benefit or perquisite value of an interest-free loan has to be computed in accordance with the prescribed formula under the Income Tax Act, and not on an ad-hoc basis, as per the directive of the Income Tax Appellate Tribunal (ITAT).

Yes, exemptions are granted for interest-free loans availed for medical treatment of specific diseases, or when the loan amount is within the specified exemption limit of Rs 20,000.

It is the employee's responsibility to ensure that the employer duly deducts tax from source, which includes the perquisite value of interest-free loans. If the employee fails to do so, they may face consequences such as interest for delayed payment of advance tax, income tax payable on the perquisite value, and penalties.

If an employee fails to report the perquisite value of an interest-free loan in their income tax returns, they may be imposed with a penalty that could range anywhere between 50% to 200% of the tax payable on the under-reported income.

The article does not specify the diseases for which interest-free loans are exempted from being considered as a perquisite. However, it does mention that exemptions are granted for loans availed with respect to medical treatment of specific diseases.

No, TDS (Tax Deduction at Source) will not be applicable on interest-free loans provided by an employer if the loan amount is within the specified exemption limit of Rs 20,000.

According to the Income Tax Act, the responsibility to perform tax deductions might be vested with the employer for interest-free loans treated as a taxable perquisite. This means the employer is responsible for deducting the appropriate tax amount from the employee's salary.