• The prescribed interest rate is the rate charged by the State Bank of India (SBI) as on the 1st day of the relevant previous year in respect of loans of the same type and for the same purpose advanced by it to the general public.
• The value of the perquisite is the excess of interest payable at the prescribed interest rate over the interest, if any, actually paid by the employee or any member of his household.
• The perquisite is to be calculated on the basis of the maximum outstanding monthly balance method.

For example, if an employee takes an interest-free loan of Rs.100,000 from his employer in April 2023, the prescribed interest rate for that month is 7.5%. The value of the perquisite for the month of April 2023 will be Rs.750 (100,000 x 7.5%).

The value of the perquisite is to be calculated for each month during which the loan is outstanding. The total value of the perquisite is to be added to the employee’s income and taxed accordingly.

There are two exceptions to the above rule under Income Tax Act:

• Loans up to Rs.20,000 are exempt from tax.
• Loans for medical treatment are exempt from tax, provided the loan is taken from a bank or financial institution.

EXAMPLE

1. Assume that the State Bank of India (SBI) charges an interest rate of 10% per annum on loans of the same type and for the same purpose advanced by it to the general public.

• An employer provides an interest-free loan of Rs.1 lakh to an employee.
• The value of the perquisite in this case will be the excess of interest payable at the prescribed interest rate (10%) over the interest actually paid (nil).
• e., Value of perquisite = (10% of Rs.1 lakh) – (Nil) = Rs.10,000

1. Assume that the SBI charges an interest rate of 10% per annum on loans of the same type and for the same purpose advanced by it to the general public.

An employer provides a loan of Rs.1 lakh to an employee at an interest rate of 5% per annum.

The value of the perquisite in this case will be the excess of interest payable at the prescribed interest rate (10%) over the interest actually paid (5%).

i.e., Value of perquisite = (10% of Rs.1 lakh) – (5% of Rs.1 lakh) = Rs.5,000

CASE LAWS

• CIT v. Hindustan Steel Ltd. (1981) 128 ITR 474 (SC): In this case, the Supreme Court held that the value of the perquisite in respect of an interest-free loan or concessional rate of interest is the excess of the interest payable at the prescribed rate over the interest actually paid. The prescribed rate is the rate charged by the State Bank of India as on the 1st day of the relevant previous year in respect of loans of the same type and for the same purpose advanced by it to the general public.
• CIT v. MMTC Ltd. (1995) 212 ITR 332 (SC): In this case, the Supreme Court held that the value of the perquisite is to be calculated on the basis of the maximum outstanding monthly balance. This means that the interest is to be calculated on the highest amount of loan outstanding during the month, even if the actual amount outstanding may have been lower at some point during the month.
• CIT v. M/s. MVL Industries (2009) 308 ITR 408 (SC): In this case, the Supreme Court held that the value of the perquisite is to be determined even if the loan is not utilized by the employee. This is because the employee has the option to utilize the loan, and the employer has given him the benefit of a loan at a concessional rate.

In addition to these case laws, there are also a few Income Tax Circulars and Notifications that provide guidance on the valuation of perquisite in respect of interest-free loan or concessional rate of interest.

• Income Tax Circular No. 662 dated 28th June, 1995: This circular clarifies that the value of the perquisite is to be determined on the basis of the maximum outstanding monthly balance, even if the loan is taken for a shorter period of time.
• Income Tax Notification No. 108 dated 31st December, 2003: This notification provides the rates of interest that are to be used for calculating the value of the perquisite.

FAQ Questions                                                                                                                    

What is an interest-free loan or concessional rate of interest loan under Income Tax Act?

An interest-free loan or concessional rate of interest loan is a loan that is provided by an employer to an employee at no interest or at a lower interest rate than the market rate.

• Is the value of an interest-free loan or concessional rate of interest loan taxable under Income Tax Act?

Yes, the value of an interest-free loan or concessional rate of interest loan is taxable as a perquisite in the hands of the employee. However, there are certain exemptions, such as loans up to Rs. 20,000 and loans for medical treatment.

• How is the value of an interest-free loan or concessional rate of interest loan determined under Income Tax Act?

The value of an interest-free loan or concessional rate of interest loan is determined as the excess of interest payable at the prescribed interest rate over the interest actually paid by the employee. The prescribed interest rate is the rate charged by the State Bank of India as on the 1st day of the relevant previous year in respect of loans of the same type and for the same purpose advanced by it to the general public.

• What is the prescribed interest rate for interest-free loans or concessional rate of interest loans under Income Tax Act?

The prescribed interest rate for interest-free loans or concessional rate of interest loans is the rate charged by the State Bank of India as on the 1st day of the relevant previous year in respect of loans of the same type and for the same purpose advanced by it to the general public.

• How is the value of an interest-free loan or concessional rate of interest loan calculated under Income Tax Act?

The value of an interest-free loan or concessional rate of interest loan is calculated on the basis of the maximum outstanding monthly balance method. This means that the value of the perquisite is calculated by multiplying the prescribed interest rate by the maximum outstanding monthly balance of the loan.

• What are the exemptions for interest-free loans or concessional rate of interest loans under Income Tax Act?

There are two exemptions for interest-free loans or concessional rate of interest loans:

* Loans up to Rs.20,000

* Loans for medical treatment of specified diseases

• What are the consequences of not reporting the value of an interest-free loan or concessional rate of interest loan under Income Tax Act?

If an employee does not report the value of an interest-free loan or concessional rate of interest loan, they may be liable to pay tax on the amount of the perquisite, as well as interest and penalties.