Loan provided to employees – Perquisite calculation – Part II
In the previous post, we had a look at the basis of perquisite calculation on loans provided to employees and members of their household. According to Rule 3 (7)(i) of the Income Tax rules, the taxable value of benefit an employee derives on account of a loan provided to him is equal to the Rupee value of the interest payable on a similar loan provided by the State Bank of India (SBI). For the purpose of perquisite calculation, SBI’s interest rate, as on 1st April of the year in which the loan schedule is in effect, should be considered.
The interest benefit (as stated above) should be calculated on the maximum outstanding monthly balance (of the loan in the loan repayment schedule) as reduced by any interest paid by the employee. “Maximum outstanding monthly balance” refers to the loan balance as on the last day of each month.
Let us take a look at some illustrations to understand how loan perquisite should be calculated.
Illustration 1
An employee is provided with a loan of Rs 10,000 which is recovered across 10 installments from the employee’s salary each month. The employee does not receive any other loan in the year.
Perquisite calculation: The perquisite value is zero since the total loan amount provided does not exceed Rs 20,000 in the year.
Illustration 2
An employee is provided with a loan of Rs 100,000 which is recovered across 10 installments from the employee’s salary each month. The loan is provided for the purpose of the employee meeting expenses related to the treatment of a disease which is listed in Rule 3A of the Income Tax rules.
Perquisite calculation: The perquisite value is zero since the loan is provided for treatment of a disease which is specified in Rule 3A. However, the employer should seek relevant documents to establish the proof of expenses (medical certificate, bills etc.) for treatment of the disease.
Illustration 3
On 01-May-2013, an employee is provided with an interest free personal loan of Rs 100,000 which is recovered across 10 installments from the employee’s salary each month starting May 2013. The SBI interest rate as on 01-Apr-2013 is 14.7%.
Perquisite calculation: The perquisite value for the year 2013-14 is calculated as follows.
| Month | Opening Balance | Monthly Deduction | Closing Balance (Maximum Outstanding Monthly Balance) | Perquisite Value** |
|---|---|---|---|---|
| May-13 | 100,000.00 | 10,000.00 | 90,000.00 | 1,102.50 |
| Jun-13 | 90,000.00 | 10,000.00 | 80,000.00 | 980.00 |
| Jul-13 | 80,000.00 | 10,000.00 | 70,000.00 | 857.50 |
| Aug-13 | 70,000.00 | 10,000.00 | 60,000.00 | 735.00 |
| Sep-13 | 60,000.00 | 10,000.00 | 50,000.00 | 612.50 |
| Oct-13 | 50,000.00 | 10,000.00 | 40,000.00 | 490.00 |
| Nov-13 | 40,000.00 | 10,000.00 | 30,000.00 | 367.50 |
| Dec-13 | 30,000.00 | 10,000.00 | 20,000.00 | 245.00 |
| Jan-14 | 20,000.00 | 10,000.00 | 10,000.00 | 122.50 |
| Feb-14 | 10,000.00 | 10,000.00 | – | – |
| Total | 100,000.00 | 5513.00 |
** Perquisite value = Maximum Outstanding Monthly Balance (Closing Balance) x 14.7% / 12
The total perquisite value of Rs 5,513 should be included in the gross taxable salary for the purpose of taxing the employee’s salary for the year.
A word on the “maximum outstanding monthly balance.”
It may be noted that the perquisite value is calculated on the maximum outstanding balance which is defined as the outstanding balance as on the last day of each month, as per the income tax rules.
a. It is not clear what the relevance of the word maximum is in “maximum outstanding balance.”
b. It is probably little more logical to calculate the perquisite on the opening loan balance each month instead of the outstanding balance as on the last day of each month. However, the income tax rule allows calculation only on the closing balance each month. Consequently, if the loan is repaid before the last day of the month the perquisite value for that month is zero. Let us take a look at the next illustration to understand this.
Illustration 4
On 01-May-2013, an employee is provided with an interest free personal loan of Rs 100,000 which is repaid by the employee in full on 25-May-2013. The SBI interest rate as on 01-Apr-2013 is 14.7%.
Perquisite calculation: The maximum outstanding balance (the outstanding balance as on the last day of May 13) is zero since the loan is repaid on 25-May-2013. Hence, the perquisite value is zero.
In this case, the employee enjoys interest benefit for 25 days in May 2013. However, the perquisite value is zero on account of the fact that the perquisite value is required to be calculated on the balance as on the last day of the month.
Illustration 5
On 01-May-2013, an employee is provided with an interest free personal loan of Rs 100,000 which is recovered across 10 installments. The repayment happens on the first of each month with the first loan installment falling on 01-June-2013. The SBI interest rate as on 01-Apr-2013 is 14.7%.
Perquisite calculation: The perquisite value for the year 2013-14 is calculated as follows.
| Opening Balance | Monthly Repayment (on 1st of each month) | Closing Balance (Maximum Outstanding Monthly Balance) | Perquisite Value** | |
|---|---|---|---|---|
| May-13 | 100,000.00 | – | 100,000.00 | 1225.00 |
| Jun-13 | 100,000.00 | 10,000.00 | 90,000.00 | 1102.50 |
| Jul-13 | 90,000.00 | 10,000.00 | 80,000.00 | 980.00 |
| Aug-13 | 80,000.00 | 10,000.00 | 70,000.00 | 857.50 |
| Sep-13 | 70,000.00 | 10,000.00 | 60,000.00 | 735.00 |
| Oct-13 | 60,000.00 | 10,000.00 | 50,000.00 | 612.50 |
| Nov-13 | 50,000.00 | 10,000.00 | 40,000.00 | 490.00 |
| Dec-13 | 40,000.00 | 10,000.00 | 30,000.00 | 367.50 |
| Jan-14 | 30,000.00 | 10,000.00 | 20,000.00 | 245.00 |
| Feb-14 | 20,000.00 | 10,000.00 | 10,000.00 | 122.50 |
| Mar-14 | 10,000.00 | 10,000.00 | – | |
| Total | 100,000.00 | 6737.50 |
** Perquisite value = Maximum Outstanding Monthly Balance (Closing Balance) x 14.7% / 12
The total perquisite value of Rs 6,737.50 should be included in the gross taxable salary for the purpose of taxing the employee’s salary for the year.
Some more thoughts..
- In Illustration 3 (and 5), if the SBI interest rate is 14.7% and if the company charges an interest rate of 14.7%, the perquisite value shall be zero since the concession (difference between SBI interest rate and the rate charged by the company) is zero.
- In Illustration 3 (and 5), if the SBI interest rate is 14.7% and if the company charges an interest rate of 4.7%, the perquisite value shall be calculated on 10% since the concession (difference between SBI interest rate and the rate charged by the company) is 10%.
- Please prepare the loan repayment schedule for each month and calculate the perquisite value for each month. Please factor in scheduled loan repayment, premature loan repayment, non-repayment of one or more installment by the employee (for whatever reason) while calculating the perquisite value.
- If the loan repayment schedule extends beyond one tax year into the second year, the perquisite value for the first year should be calculated on the basis of the SBI interest rate as on 01-Apr of the first year and the the perquisite value for the second year should be calculated on the basis of the SBI interest rate as on 01-Apr of the second year.
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Leave a Comment (25) ↓
Excellent knowledge sharing !! Please keep up the good work.
Does the rate of interest applied depends on the purpose of the usage of the loan taken? Say, if I take an interest free loan from my employer for the purpose of repaying my home loan, will it consider SBI home loan interest?
Yes, Rules 3 (Income Tax Rules) pertaining to valuation of perquisites states that SBI interest rate for the “same purpose” should be considered for the purpose of perquisite calculation.
However, if there were to be an inquiry by the Income Tax Department, the employee and the employer may have to provide proof that the loan was indeed provided and utilized for the purpose of house construction.
What if the loan is taken on mid of the month. Lets say i have taken loan on 15th of Jan. In that case interest would be calculated for 15days?
Yes, the interest perquisite should be calculated from the date of loan disbursement.
Very simple way to understand the calculation of perks value.Good Job.
Further ,I want to know the reimbursement of medical expenses at domiciliary treatment .Is it includ in Gross income?
Kindly provide 3a 9disease list)
Note sure what you mean by “3a 9disease list.”
Dear Sir,
One of our client given loan to employee in the month of March 2015 and they are telling we need to calculate the tax on perquisite for 1 month…..
My query is without deduct any installment pay need to calculate tax on perquisite ?
Yes, the perquisite value should be calculated even if there is no deduction.
Hi Gautham,
Need to ask you about the case where Company is allowing all its employees to avail interest free loan (based on need and approval) and does not restricted it to certain office or position.
Can you please help me understand the tax implication on both Employee and Company end?
Thank you
Chandra Shekhar Singh
Company: Should calculate the perquisite value on the interest free loan and calculate the taxable salary accordingly.
Employee: Will have to bear the tax liability on account of the perquisite value of the interest free loan availed.
Thanks for the information…the answer of my question i got from the above comments…thanks
Hi Gautham,
Thanks a lot for sharing, its good to understand the Perk Calculation here..
Is there any other Perk calculation blog has been posted here .. i am trying to search.
is your payroll only related to india?
thanks
Bharath
Is there any other Perk calculation blog has been posted here .. i am trying to search.
Ans: I think there are 2 blog posts related to loan perk calculation on our site.
is your payroll only related to india?
Ans: Yes.
Good Example are given and its very easy to understand for a layman.
Good Website for understanding the tax implications on loan from Employer .
Good Knowledge sharing Gautam..
i have one query.
My employer provided me Home Loan with concessional rate. as per my sanction in the first 5 years i am required to pay only Simple interest. and in the next 5 year i am required to pay only installment. how should i calculate perk in my case?
The methodology for the perquisite calculation remains the same. For the first 5 years, there will be zero principal repayment and the perquisite should be calculated as the difference between the SBI reference rate and the actual interest paid.
Thanks guatam..
great….so much helpful
Wonderful share, thank you.
How does the valuation change if loan is provided at a discounted rate of interest and both interest and principal is payable after say 2 years?
The perquisite value is the difference between the actual interest payable and the equivalent interest amount as per SBI reference rate. In the case you have mentioned, the interest payable should be calculated after applying the discounted rate or zero per cent if there is no interest payable in a year.
Hi, I have availed housing loan and repayment option is for 30 years..our company gives hosing loan at 5%. In the initial years interest will be high and later years interest will be low because outstanding amount gets reduces..so our company makes average of 360 months interest and deducts the equated interest..now when we are calculating the perquisite in the same manner, whether we have to make SBI interest rate also equate for 360 months or not. And the difference of equated interest of SBI and our company equated interest will be the perquisite? Does this correct?
Not sure what you mean by “equated interest”. Please look at the exact interest amount you will be paying your company each year for the purpose of comparison with SBI interest amount. You need to use the corresponding SBI reference rate for each the 30 years.