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We all are suffering from this covid pandemic. This is a tough time for all of us. Many organizations across the globe are offering loans to employees to support them in these difficult times. Here are the income tax implications for employees for the loans or advances offered by the employer.

What is it?

  • Interest free/concessional rates loans to employees by the employer is a prerequisite u/s 17(2) of Income-tax act
  • Hence it is taxable in the hands of employees
  • The value of perquisite shall be determined as per Rule 3 of the Income Tax Rules
Income Tax Implications on Loans to Employees

As per rule 3 of income tax rules 1962

(7) In terms of provisions contained in sub-clause (viii) of clause (2) of section 17, the following other benefits or amenities and value thereof shall be determined in the manner provided hereunder:

(i)The value of the benefit to the assessee resulting from the provision of interest-free or concessional loan for any purpose made available to the employee or any member of his household during the relevant previous year by the employer or any person on his behalf shall be determined as the sum equal to the interest computed at the rate charged per annum by the State Bank of India, constituted under the State Bank of India Act, 1955 (23 of 1955), as on the 1st day of the relevant previous year in respect of loans for the same purpose advanced by it on the maximum outstanding monthly balance as reduced by the interest, if any, actually paid by him or any such member of his household:

Provided that no value would be charged if such loans are made available for medical treatment in respect of diseases specified in rule 3A of these Rules or where the amount of loans are petty not exceeding in the aggregate twenty thousand rupees:

 

Provided further that where the benefit relates to the loans made available for medical treatment referred to above, the exemption so provided shall not apply to so much of the loan as has been reimbursed to the employee under any medical insurance scheme.

Are there any exemption cases?

Referring to the above rule 3

  • if such loans are made available for medical treatment in respect of specified disease as mentioned in rule 3A of income tax rules
  • if such loans do not exceed 20k in aggregate during the previous year
 

How to calculate the value of perquisites?

Mr. A is an employee whose monthly salary is INR 1L and has taken advance from employer INR 1L. Which is to be recovered in the 4 equal months. Valuation of perquisites as follows;

  1st Month 2nd Month 3rd Month 4th Month
Sl. No Particulars INR INR INR INR
1 Advance/Loan Provided 1L 1L 1L 1L
2 Less: Cumulative Advance recovery  25K 50K 75K 1L
3 Outstanding loan/advance at the end of the month (1-2) 75L 50L 25L 0
4 Monthly Interest ( To be calculated as per SBI lending rate say 10%) 625 417 208 0
5 Interest recovered from the employee 0 0 0 0
6 Value of Perquisites (4-5) 625 417 208 0

On a side note, govt should consider adding covid-19 as a specified disease. so that employees can take the tax benefit medical expenditures incurred and the loan taken for covid-19 infection


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Category Income Tax, Other Articles by - Ajay Kumar Maggidi 



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