Explained: Received an interest-free loan money from employer? Know what this special benefit means; when it is taxable

If you have received an interest-free loan or a loan at a lower-than-market interest rate from your employer, it can make borrowing cheaper than taking a loan from a bank. However, under income-tax rules, this benefit has tax implications.

Here’s what this concessional loan means, how the taxable amount is calculated, and when the benefit is exempt.

What does an employer loan mean under income tax rules?

When an employer provides an interest-free or concessional loan to an employee or a member of their household, the value of such benefit is taxable as a “perquisite”.

A perquisite is a benefit or facility provided by an employer in addition to an employee’s salary. It arises when employers offer loans for personal purposes such as education, medical treatment or marriage.

These loans can be interest-free or carry a lower interest rate than market rates, with repayments generally deducted from the employee’s salary over time.

Since employees borrowing from their employers may pay less interest than those borrowing from banks at market rates, the tax rules provide for the interest benefit to be treated and taxed as a perquisite.

The rules also apply if the employer provides a loan to the employee’s household members, including their spouse, children and their spouses, parents, servants and dependants.

How is the taxable value of a perquisite calculated?

The taxable value is calculated by comparing the interest that would have been payable at the applicable State Bank of India (SBI) rate for a similar loan with the interest, if any, recovered from the employee.

The calculation involves four steps:

Step 1: Calculate the outstanding loan balance received from the employer on the last day of each month.

Step 2: Calculate interest on these balances using SBI’s rate for a similar loan on the first day of the financial year.

Step 3: Deduct the interest actually paid by the employee to the employer.

Step 4: The remaining amount is the taxable perquisite.

For example, if the interest calculated at the bank-offered rate is ₹12,000 and the employee pays ₹4,000 in interest, the taxable benefit is ₹8,000.

When is an employer loan exempt from tax?

Here are the two key conditions under which these loans are exempt from tax.

1. Loans up to ₹20,000

Interest-free or concessional loans of up to ₹20,000 are exempt. For example, if an employee receives an interest-free loan of ₹19,000 from their employer to renovate their house, the interest benefit is exempt from tax. The employee does not have to pay income tax on this benefit because the loan amount does not exceed ₹20,000.

However, if the original loan exceeded ₹20,000, reducing the outstanding balance below this limit does not make it an exempt petty loan. Multiple loans must be aggregated to determine whether the threshold is exceeded. If an employee takes multiple loans whose combined amount exceeds ₹20,000, the entire amount is considered for tax calculation.

2. Loans for specified medical treatment

Loans for treating specified diseases in approved hospitals are exempt. These include cancer, tuberculosis, AIDS, certain serious illnesses requiring surgery or hospitalisation, fractures requiring surgery or orthopaedic treatment, and specified gynaecological conditions, burns, mental disorders, drug addiction and anaphylactic shock.

However, the exemption does not apply to the extent that the medical expenses are reimbursed by an insurance company and the reimbursed amount remains unpaid against the loan.

For example, if an employee borrows ₹2 lakh for eligible medical treatment and later receives ₹50,000 from an insurer, the exemption continues for ₹1.5 lakh. The perquisite value on the remaining ₹50,000 is calculated from the date of insurance reimbursement.

When is an employer loan taxable?

An interest-free or concessional loan will attract tax under the head ‘Salaries’ as a perquisite if it exceeds ₹20,000 and does not qualify for medical exemption. Employees should check the applicable tax rules and their employer’s loan records to determine the correct taxable amount.

Disclaimer: This is for informational purposes only. Consult a qualified tax professional for advice specific to your circumstances.