In this article, we will discuss the taxable value of Interest free loan/ concessional loan u/s 3(7)(i) of the Income Tax Act, 1961.
Find out the taxable value of the Interest free/Concessional loan as per rule 3(7) (i).
Interest-free loan or concessional loan [Rule 3(7) (i)]: Such benefit is taxable in the hands of all employees (whether specified or not) under section 17(2)(viii). The value of such perquisite shall be determined as follows :
Steps to be followed for computation of value of such perquisite:
| Step-1 | Compute ‘maximum outstanding monthly balance’. |
| Step-2 | Charge the appropriate interest rate (i.e. rate charged by SBI as on the 1st day of the relevant previous year for the same purpose- refer to note 1 below) on ‘maximum outstanding monthly balance’ to obtain monthly of interest. |
| Step-3 | Make total of monthly interest for all months of the relevant previous year. |
| Step-4 | Deduct interest, if any, actually paid by the employee or any member of his household from the total interest- balance left is the value of perquisite. |
Notes:
1. Interest rates:
Different interest rates are notified by the SBI for different types of loan (e.g. housing loan, car loan, education loan, etc.). Such interest rates may vary depending upon the amount of loan sanctioned. Such rates are available from the official website of SBI. Interest rate charged by SBI on the first day of the relevant previous year shall be applicable to determine the value of perquisite under this section.
Read Also:
Explain the provision relating to ‘Profits in Lieu of Salary’
Find out the taxable value of the Interest free/Concessional loan as per rule 3(7) (i).
2. Perquisite not taxable in certain cases:
Perquisite in respect of interest-free loan or loan at concessional rate is not taxable in the following cases:
| Case-1 | Where such loan are made available for medical treatment in respect in respect of diseases specified in rule 3A (however, such exemption shall not apply to so much of the loan as has been reimbursed to the employee under any medical insurance scheme); or |
| Case-2 | Where the amount of original loan (or loans) are petty not exceeding in the aggregate ₹ 20,000. |
3. Outstanding loan:
The provision of this section shall be applicable even in case of outstanding loan taken before April 1, 2001 i.e. before the new rule came into force (Circular No. 15/2001, dated December 12,2001).
4. Loan given by a closely-held company:
If a closely-held company gives a loan to an employee who holds at least 10% voting power, such loan is deemed as dividend under section 2(22)(e) if certain conditions are fulfilled. In such a case also the value of perquisite in respect of interest-free loan is chargeable to tax-CIT.
5. Notional interest:
Notional interest on interest free security deposit given by the employer in respect of a flat taken by the employee on lease is not treated as perquisite.
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