Interest-free Loans From Employer Are Taxable

Published on 12 Jun 2018 by Shivi

The Income Tax Appellate Tribunal (ITAT) has stated that Interest-free loans extended by an employer are taxable in the hands of an employee as a perquisite. The Tribunal also said the valuation of perquisite which forms part of the salary income of the employee cannot be done in the same manner and has to be computed as per the prescribed formula under the Income Tax Act.

In this case, a private company Teej Impex relinquished an interest-free loan to her employee Neha Saraf. During the assessment for the financial year 2010-11, Neha Saraf said in her argument that no employer-employee relationship existed fell through because the company had deducted tax at source, or TDS, on the salary of Rs. 24 lakh paid to her.

The designated IT officer of her case estimated 15% interest on the loan and added Rs. 43.8 lakh to her income as a perquisite value of the interest-free loan. In the next stage of appeal, the commissioner of IT held that the IT officer had correctly treated the value of the interest-free loan as a taxable perquisite in the hands of the employee.

A perquisite value is based on the rate charged by SBI on April 1 of the financial year in which the employee received the loan according to IT Act rules. The commissioner reworked the valuation and arrived at a lower perquisite value of Rs. 20.65 lakh.

The commissioner also rejected Saraf’s contention that, as interest on the loan given to her had already been disallowed in the hands of the company, it cannot be treated as a prerequisite in her hands. Unhappy with the outcome, Saraf filed an appeal with the ITAT. The ITAT upheld the order of the commissioner in its order dated May 16.

The director of People Advisory Services at Ernst and Young, Puneet Gupta stated that the employer is liable to treat an interest-free loan as a taxable perquisite and TDS is to be deducted from salary. An exemption is available if the loan is provided for medical treatment of specified diseases or where the loan amount is petty and does not exceed Rs. 20,000.

Tags: Income Tax 

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