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In an earlier previous post, we had a look at the basis of perquisite calculation on loans provided to employees and members of their household. According to Rule 3 (7)(i) of the Income Tax rules, the taxable value of benefit an employee derives on account of a loan provided to him is equal to the Rupee value of the interest payable on a similar loan provided by the State Bank of India (SBI). For the purpose of perquisite calculation, SBI’s interest rate, as on 1st April of the year in which the loan schedule is in effect, should be considered.

The interest benefit (as stated above) should be calculated on the maximum outstanding monthly balance (of the loan in the loan repayment schedule) as reduced by any interest paid by the employee. “Maximum outstanding monthly balance” refers to the loan balance as on the last day of each month.

Let us take a look at some illustrations to understand how loan perquisite should be calculated.

Illustration 1

An employee is provided with a loan of Rs 10,000 which is recovered across 10 installments from the employee’s salary each month. The employee does not receive any other loan in the year.

Perquisite calculation: The perquisite value is zero since the total loan amount provided does not exceed Rs 20,000 in the year.

Illustration 2

An employee is provided with a loan of Rs 100,000 which is recovered across 10 installments from the employee’s salary each month. The loan is provided for the purpose of the employee meeting expenses related to the treatment of a disease which is listed in Rule 3A of the Income Tax rules.

Perquisite calculation: The perquisite value is zero since the loan is provided for treatment of a disease which is specified in Rule 3A. However, the employer should seek relevant documents to establish the proof of expenses (medical certificate, bills etc.) for treatment of the disease.

Illustration 3

On 01-May-2013, an employee is provided with an interest free personal loan of Rs 100,000 which is recovered across 10 installments from the employee’s salary each month starting May 2013. The SBI interest rate as on 01-Apr-2013 is 14.7%.

Perquisite calculation:  The perquisite value for the year 2013-14 is calculated as follows.

Month Opening Balance Monthly Deduction Closing Balance (Maximum Outstanding Monthly Balance) Perquisite Value**
May-13                 100,000.00                   10,000.00                                               90,000.00                 1,102.50
Jun-13                  90,000.00                   10,000.00                                               80,000.00                    980.00
Jul-13                  80,000.00                   10,000.00                                               70,000.00                    857.50
Aug-13                  70,000.00                   10,000.00                                               60,000.00                    735.00
Sep-13                  60,000.00                   10,000.00                                               50,000.00                    612.50
Oct-13                  50,000.00                   10,000.00                                               40,000.00                    490.00
Nov-13                  40,000.00                   10,000.00                                               30,000.00                    367.50
Dec-13                  30,000.00                   10,000.00                                               20,000.00                    245.00
Jan-14                  20,000.00                   10,000.00                                               10,000.00                    122.50
Feb-14                  10,000.00                   10,000.00                                                      -                           -
 Total                   100,000.00                  5513.00

** Perquisite value = Maximum Outstanding Monthly Balance (Closing Balance) x 14.7% / 12

The total perquisite value of Rs 5,513 should be included in the gross taxable salary for the purpose of taxing the employee’s salary for the year.

A word on the “maximum outstanding monthly balance.”

It may be noted that the perquisite value is calculated on the maximum outstanding balance which is defined as the outstanding balance as on the last day of each month, as per the income tax rules.

a. It is not clear what the relevance of the word maximum is in “maximum outstanding balance.”

b. It is probably little more logical to calculate the perquisite on the opening loan balance each month instead of the outstanding balance as on the last day of each month. However, the income tax rule allows calculation only on the closing balance each month. Consequently, if the loan is repaid before the last day of the month the perquisite value for that month is zero. Let us take a look at the next illustration to understand this.

Illustration 4

On 01-May-2013, an employee is provided with an interest free personal loan of Rs 100,000 which is repaid by the employee in full on 25-May-2013. The SBI interest rate as on 01-Apr-2013 is 14.7%.

Perquisite calculation:  The maximum outstanding balance (the outstanding balance as on the last day of May 13) is zero since the loan is repaid on 25-May-2013. Hence, the perquisite value is zero.

In this case, the employee enjoys interest benefit for 25 days in May 2013. However, the perquisite value is zero on account of the fact that the perquisite value is required to be calculated on the balance as on the last day of the month.

Illustration 5

On 01-May-2013, an employee is provided with an interest free personal loan of Rs 100,000 which is recovered across 10 installments. The repayment happens on the first of each month with the first loan installment falling on 01-June-2013. The SBI interest rate as on 01-Apr-2013 is 14.7%.

Perquisite calculation:  The perquisite value for the year 2013-14 is calculated as follows.

Month Opening Balance Monthly Repayment (on 1st of each month) Closing Balance (Maximum Outstanding Monthly Balance) Perquisite Value**
May-13 100,000.00 - 100,000.00 1225.00
Jun-13 100,000.00 10,000.00 90,000.00 1102.50
Jul-13 90,000.00 10,000.00 80,000.00 980.00
Aug-13 80,000.00 10,000.00 70,000.00 857.50
Sep-13 70,000.00 10,000.00 60,000.00 735.00
Oct-13 60,000.00 10,000.00 50,000.00 612.50
Nov-13 50,000.00 10,000.00 40,000.00 490.00
Dec-13 40,000.00 10,000.00 30,000.00 367.50
Jan-14 30,000.00 10,000.00 20,000.00 245.00
Feb-14 20,000.00 10,000.00 10,000.00 122.50
Mar-14 10,000.00 10,000.00  -  
Total   100,000.00   6737.50

** Perquisite value = Maximum Outstanding Monthly Balance (Closing Balance) x 14.7% / 12

The total perquisite value of Rs 6,737.50 should be included in the gross taxable salary for the purpose of taxing the employee’s salary for the year.

Some more thoughts.

1. In Illustration 3 (and 5), if the SBI interest rate is 14.7% and if the company charges an interest rate of 14.7%, the perquisite value shall be zero since the concession (difference between SBI interest rate and the rate charged by the company) is zero.

2. In Illustration 3 (and 5), if the SBI interest rate is 14.7% and if the company charges an interest rate of 4.7%, the perquisite value shall be calculated on 10% since the concession (difference between SBI interest rate and the rate charged by the company) is 10%.

3. Please prepare the loan repayment schedule for each month and calculate the perquisite value for each month. Please factor in scheduled loan repayment, premature loan repayment, non-repayment of one or more installment by the employee (for whatever reason) while calculating the perquisite value.

4. If the loan repayment schedule extends beyond one tax year into the second year, the perquisite value for the first year should be calculated on the basis of the SBI interest rate as on 01-Apr of the first year and the the perquisite value for the second year should be calculated on the basis of the SBI interest rate as on 01-Apr of the second year.

Hinote Systems

Hinote provides services/software related to payroll, leave and attendance.

www.hinote.in/blog, info@hinote.in

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Category Income Tax, Other Articles by - T E Gautham 



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