Perquisite on interest free loan to employee

Dear all,

I would request your opinion on below issue. We are a company and giving salary advance to employees. Salary advance would be considered as interest free loan and would be considered as perquisite taxable in the hands of employee.

interest free loan or loan at concenssional rate is considered as perquisite u/r 3(7). Value of perquisite would be calculated as under

1) Find out the maximum outstanding balance as on the last day of the each month.

2) Find out the rate of interest charged by SBI on the first day of the relevant previous year.

3) Calculate interest for each month on the outstanding balance calculated in step 1 at the rate calculated in step 2.

4) Total Interest calculated for the previous year in step 3, deduct interest if any recovered from employee. Balance amount is taxable perquisite. 

I have checked the SBI lending rate and the rate for personal loan is 18.5%

 

My query is 

1) Is it ok to apply SBI lending rate of 18.5%?

2) Will entire 18.5% be taxable in hands of employee? 

As per new companies act, company has to charge 9% interest to employee for any loan. Considering this is 18.5% a reasonable to charge from employee and add to his salary? Also should 9% be considered as interest expenses and balance 9.5% be considered as salary expenses??

Request your valuable opinion.

Thanks.

Replies (3)

For A.Y 14-15 the interest rates is 18.20% p.a [confirm once again]

Yes, they specifically mentioned to use SBI rates,(see)

Entire 18.20% should be taxable

For income tax purpose we will have to use this , irrespective of whats in Companies Act

 

 

Text from circular

 

"The value of perquisite arising from such loans would be the excess of interest payable at prescribed interest rate over interest, if any, actually paid by the employee or any member of his household. The prescribed interest rate would be the rate charged per annum
by the State Bank of India as on the 1st day of the relevant financial year in respect of loans of
same type and for the same purpose advanced by it to the general public. Perquisite value would be calculated on the basis of the maximum outstanding monthly balance method. For valuing perquisites under this rule, any other method of calculation and adjustment otherwise adopted by the employer shall not be relevant. However, small loans up to Rs. 20,000/- in the aggregate are exempt."

Agree with Z

 

Find out the Interest  charged by SBI as on the 1st of April (of the same year in which the loan has been given) – for a loan SBI would give for the same purpose.

In case a closely held company gives a loan to an employee who holds 10% or more of the voting power, such loan is considered a dividend under section 2(22)(e), upon satisfaction of a few conditions.

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