URGENT - Interest Free Loan
This query is : Resolved
05 April 2011
Whether
a) interest free loan
b) loan at existing bank rate
c) loan at cost of funding to company which is higher than existing bank rate
be given to employees or for the benefit of employees to a trust?.
Plz make reference to attracting sections of different Acts for the consequences for Company?
a) interest free loan
b) loan at existing bank rate
c) loan at cost of funding to company which is higher than existing bank rate
be given to employees or for the benefit of employees to a trust?.
Plz make reference to attracting sections of different Acts for the consequences for Company?
05 April 2011
In interest free loan, the full amount shall be regarded as perquisite in the hand of the employee
2.If the loan given at SBI rate, there is no perquisite is warranted. But if the interest rate vary from this rate , then the difffernce shall be regarded as perk
3. If it is higher than the SBI rate nothing shall be treated as perk.
2.If the loan given at SBI rate, there is no perquisite is warranted. But if the interest rate vary from this rate , then the difffernce shall be regarded as perk
3. If it is higher than the SBI rate nothing shall be treated as perk.
05 April 2011
Plz make references to the diff sections.
05 April 2011
What are the consequences in the hands of Company?
02 August 2025
Certainly! Here’s a detailed explanation with **relevant sections** and **consequences** for the company when providing loans to employees or employee-benefit trusts:
---
## 1. **Interest-Free Loan to Employees**
### Tax Implication in Hands of Employee (Perquisite):
* As per **Section 17(2)(viii)** of the **Income Tax Act, 1961**:
* The **difference between interest payable on loan at prescribed rate and interest actually paid** by the employee is treated as a **perquisite**.
* For an **interest-free loan**, the entire loan amount is considered as the value of perquisite.
* The **prescribed rate of interest** is defined under **Rule 3 of the Income Tax Rules**, generally linked to SBI’s rate.
### Consequences for the Company:
* Under **Section 37(1)**, expenses incurred in providing such loan (interest foregone) **may not be allowable** as business expenditure if it’s a perquisite.
* The company is required to **deduct TDS under Section 192** on the value of perquisite (interest benefit).
* Under **Section 2(24)(iv)**, this benefit is considered a **deemed income in the hands of employees** but no direct income for company.
* The company’s responsibility: **Compliance in TDS deduction and reporting**.
---
## 2. **Loan at Existing Bank Rate (Prescribed Rate of Interest)**
### Tax Implication in Hands of Employee:
* If interest charged equals **prescribed rate (e.g., SBI base rate)**, **no perquisite arises**.
* No taxable benefit since actual interest = prescribed interest.
### Consequences for Company:
* No perquisite value, so no TDS on perquisite.
* Interest received is **business income** for the company.
* Interest paid on the loan (if any) to the bank can be claimed as expense.
---
## 3. **Loan at Cost of Funding to Company (Higher than Prescribed Rate)**
### Tax Implication in Hands of Employee:
* Since interest charged is **higher than prescribed rate**, no perquisite arises.
* Employee pays more than market rate, so no benefit.
### Consequences for Company:
* Interest received is taxable business income.
* No additional compliance on perquisite or TDS on perquisite.
* Interest expense (if any) can be claimed as business expense.
---
## 4. **Loan to Trust for Benefit of Employees**
* The **perquisite treatment flows to employees only if the benefit is passed on**.
* If loan is interest-free or concessional to the trust, **Section 17(2)(viii)** applies to employees based on actual benefit.
* For the company, similar TDS and compliance obligations exist as above.
---
## **Summary Table:**
| Loan Type | Perquisite in Employee’s Hands | Consequences for Company | Relevant Sections |
| ----------------------------------- | -------------------------------------- | ------------------------------------ | -------------------------------- |
| Interest-Free Loan | Full loan amount treated as perquisite | TDS on perquisite, compliance needed | Sec 17(2)(viii), Sec 192, Rule 3 |
| Loan at Prescribed Bank Rate | No perquisite | Interest income taxable, no TDS | Sec 17(2)(viii), Rule 3 |
| Loan at Cost of Funding > Bank Rate | No perquisite | Interest income taxable, no TDS | Sec 17(2)(viii), Rule 3 |
---
### **Important Notes:**
* **Prescribed Rate of Interest:** Refer to **Rule 3 of the Income Tax Rules**, updated annually.
* Failure to deduct TDS on perquisite may lead to penalties under **Sections 201/271C**.
* The company’s **accounting treatment** should reflect correct interest income and related expenses.
---
If you want, I can help draft a **detailed compliance checklist** or a **sample TDS calculation sheet** for this case. Would you like that?
---
## 1. **Interest-Free Loan to Employees**
### Tax Implication in Hands of Employee (Perquisite):
* As per **Section 17(2)(viii)** of the **Income Tax Act, 1961**:
* The **difference between interest payable on loan at prescribed rate and interest actually paid** by the employee is treated as a **perquisite**.
* For an **interest-free loan**, the entire loan amount is considered as the value of perquisite.
* The **prescribed rate of interest** is defined under **Rule 3 of the Income Tax Rules**, generally linked to SBI’s rate.
### Consequences for the Company:
* Under **Section 37(1)**, expenses incurred in providing such loan (interest foregone) **may not be allowable** as business expenditure if it’s a perquisite.
* The company is required to **deduct TDS under Section 192** on the value of perquisite (interest benefit).
* Under **Section 2(24)(iv)**, this benefit is considered a **deemed income in the hands of employees** but no direct income for company.
* The company’s responsibility: **Compliance in TDS deduction and reporting**.
---
## 2. **Loan at Existing Bank Rate (Prescribed Rate of Interest)**
### Tax Implication in Hands of Employee:
* If interest charged equals **prescribed rate (e.g., SBI base rate)**, **no perquisite arises**.
* No taxable benefit since actual interest = prescribed interest.
### Consequences for Company:
* No perquisite value, so no TDS on perquisite.
* Interest received is **business income** for the company.
* Interest paid on the loan (if any) to the bank can be claimed as expense.
---
## 3. **Loan at Cost of Funding to Company (Higher than Prescribed Rate)**
### Tax Implication in Hands of Employee:
* Since interest charged is **higher than prescribed rate**, no perquisite arises.
* Employee pays more than market rate, so no benefit.
### Consequences for Company:
* Interest received is taxable business income.
* No additional compliance on perquisite or TDS on perquisite.
* Interest expense (if any) can be claimed as business expense.
---
## 4. **Loan to Trust for Benefit of Employees**
* The **perquisite treatment flows to employees only if the benefit is passed on**.
* If loan is interest-free or concessional to the trust, **Section 17(2)(viii)** applies to employees based on actual benefit.
* For the company, similar TDS and compliance obligations exist as above.
---
## **Summary Table:**
| Loan Type | Perquisite in Employee’s Hands | Consequences for Company | Relevant Sections |
| ----------------------------------- | -------------------------------------- | ------------------------------------ | -------------------------------- |
| Interest-Free Loan | Full loan amount treated as perquisite | TDS on perquisite, compliance needed | Sec 17(2)(viii), Sec 192, Rule 3 |
| Loan at Prescribed Bank Rate | No perquisite | Interest income taxable, no TDS | Sec 17(2)(viii), Rule 3 |
| Loan at Cost of Funding > Bank Rate | No perquisite | Interest income taxable, no TDS | Sec 17(2)(viii), Rule 3 |
---
### **Important Notes:**
* **Prescribed Rate of Interest:** Refer to **Rule 3 of the Income Tax Rules**, updated annually.
* Failure to deduct TDS on perquisite may lead to penalties under **Sections 201/271C**.
* The company’s **accounting treatment** should reflect correct interest income and related expenses.
---
If you want, I can help draft a **detailed compliance checklist** or a **sample TDS calculation sheet** for this case. Would you like that?
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