The loan that your employer provides may be interest-free but it cannot be tax-free. This is because the Income Tax Appellate Tribunal (ITAT) has said that interest-free loans provided by your employer are chargeable as perquisite in your hands. The Tribunal also said that the formula for calculation of perquisite has been prescribed in the Income Tax Act and cannot be calculated on ad hoc basis for the valuation of the taxable benefit. Perquisites are benefits, such as car and accommodation, which are offered by an employer on account of one’s position in the company.
According to the Income Tax Act in order to arrive at the valuation of the interest-free loan, interest has to be charged at the rate offered by SBI on April 1 of the financial year in which loan was taken. Having said that make sure that TDS is deducted by your employer on an interest-free loan, otherwise, you might end up paying interest on late payment of the advance tax. Moreover, if you do not mention it in your income tax return, it can be treated as under-reporting of income resulting in a penalty of 50 to 200 per cent.
In this case, for the financial year 2010-11, Neha Saraf got an interest-free loan of Rs 24 lakh from her employer Teej Impex, which is a private company. The company deducted tax at source, or TDS, on the amount (as part of her salary), which negated her argument that there was no employer-employee relationship between the two. To calculate the perquisite value of the interest-free loan, the I-T officer levied 15 per cent interest on the loan amounting to Rs 43.8 lakh. When it was appealed further, the commissioner of I-T (appeals) held that it is rightly treated as perquisite but the valuation is calculated on ad hoc basis.
Based on this, perquisite value was worked out again to Rs 20.65 lakh, but Neha’s appeal was rejected that it should not be treated as perquisite. She later filed the appeal with ITAT, which also said that interest-free loans are treated as perquisites.