Employees Saving Money By Availing Concessional Loans From Employers Will Be Taxed
The top court has clarified that concessional loans availed by employees is a fringe benefit that comes with the position an employee holds.
Interest-free loans, or loans granted at concessional rates by banks to their employees, will be taxable under the Income Tax Act. Such loans will qualify as 'perquisite' or fringe benefits because they are an exclusive advantage gained due to the nature of employment, the Supreme Court has said.
The top court said so in a case filed by staff unions and officers’ associations of various banks, challenging the validity of Section 17(2)(viii) of the Income Tax Act and Rule 3(7)(i) of the Income Tax Rules.
Experts said that this ruling will impact all other arrangements wherein an employee avails loans at concessional rates from its employer.
While the judgement was passed with respect to a case filed by staff unions and officers’ associations of banks, the provision under challenge does not restrict its applicability to bank employees only and is universally applicable to all employers providing any loan to the employees, SR Patnaik, partner at Cyril Amarchand Mangaldas, told NDTV Profit.
As such, the concession of a lower rate of interest was never in doubt with respect to taxability. This was applicable for loans taken by employees of corporates, public sector units and even banks, said Ankit Jain, partner at Ved Jain and Associates.
Section 17(2)(viii) of the Act includes in the definition of ‘perquisites’ any other fringe benefit or amenity as may be prescribed under law.
Consequently, Rule 3(7)(i) prescribes that interest-free or concessional loans made available to an employee or a member of his household by the employer or any person on his behalf are taxable as perquisites.
The provisions were challenged on the grounds of excessive and unguided delegation of essential legislative functions to the Central Board of Direct Taxes. It is noteworthy to mention that the CBDT is the sole authority to formulate rules under the Income Tax Act.
It was contended that Rule 3(7)(i) is arbitrary and violates Article 14 of the Constitution by treating the prime lending rate of the State Bank of India as the benchmark instead of the actual interest rate charged by the bank to a customer on a loan.
The court ruled that fixing SBI's rate of interest as a benchmark is neither an arbitrary nor unequal exercise of power. SBI is the largest bank in the country, and the interest rates fixed by it invariably impact and affect the interest rates being charged by other banks.
By fixing a single, clear benchmark for computation of the perquisite or fringe benefit, the rule prevents ascertainment of the interest rates being charged by different banks from the customers and, thus, checks unnecessary litigation.Supreme Court of India
Presently, SBI’s prime lending rate is 15%.
SBI’s PLR is significantly high and the banks rarely advance loans at that rate, Jain said. Considering PLR as a benchmark rate would mean that around 6-7% of the loan amount would be added as taxable income, even if the loan is taken by the employee as per the prevailing market rates, he said.
This disparity would practically mean that taking loans from the employer would entail a higher tax outflow, making it unfavourable to take loans from employer.Ankit Jain, Partner, Ved Jain And Associates
The top court clarified that a 'perquisite' is a fringe benefit that comes with the position an employee holds. It is incidental to employment, in excess of or in addition to the salary. It is an advantage or benefit given, because of employment that otherwise would not be available.
It stated that the enactment of subordinate legislation for levying tax on interest-free or concessional loans as a fringe benefit is within the rule-making power under the Act, and that the provisions under challenge do not showcase an excessive delegation of the 'essential legislative function.'
