Employee Savings Through Concessional Loans From Employers Face Taxation; Check Ways To Reduce Taxes

According to the Supreme Court's (SC) recent ruling, under the Income Tax Act, the interest-free or concessional loans provided by banks to their employees will be taxable. Such loans will come as ‘perquisites’ or fringe benefits. The SC has said that these loans are considered ‘exclusive advantages’ received due to the nature of the employment. The SC ruling comes as a response to a case brought by staff unions and officers’ associations of various banks. They challenged the legality of Section 12(2)(viii) of the Income Tax Act and Rule 3(7)(i) of the Income Tax Rules. Employers are required to deduct tax on the value of these perquisites, which fall under the 'salary' head. Failure to do so can result in penalties imposed by the Income Tax department. According to the Income Tax Act of 1961, employer-provided interest-free loans are classified as non-monetary benefits. Additionally, it is classified as salary and is subject to taxation.

The interest rate levied by SBI on the utmost outstanding monthly balance on the first day of the relevant previous year, less any interest paid by the employee, shall be regarded as taxable salary in the employee's possession.

In such as situation, how can an employee reduce taxes? 

Ways To Reduce Taxes: To manage the tax implications of concessional loans, individuals can explore available tax exemptions or deductions under Indian tax laws. “For instance, they can consider utilizing deductions available under Section 80C for certain investments or payments, such as contributions to Provident Fund (PF) or Equity Linked Savings Scheme (ELSS) investments, to reduce their taxable income,” Abhishek Soni, CEO, Tax2Win, an income tax portal said. 

“Moreover, negotiating with employers to spread out loan repayments over a longer period can be beneficial. This strategy can help reduce the imputed interest and taxable benefits associated with the loan. By extending the repayment period, individuals can lower the annual imputed interest, resulting in a decrease in taxable income each year. Seeking guidance from tax experts can further assist with tax-efficient strategies for managing the tax implications of concessional loans,” Soni added. 

According to experts, it is the responsibility of the employees to calculate the amount of money they save by obtaining concessional loans from their employers through a comparison with external loans. Nonetheless, interest paid on specific types of loans (e.g., home loans and education loans) is tax deductible. “As the benefit received from the reduction in the interest rate is considered as taxable salary, any deduction that reduces the taxable salary in the old tax regime would be applicable in reducing the tax burden to such an employee,” Suneel Dasari, founder and CEO of EZTax said.