No tax exemption on concessional or interest free loan from the employer, not even for bank employees, says SC
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Supreme Court clarified that Bank employees saving money by availing concessional loans from employers will be taxed !
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, said by a partner at a Consulting firm.
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 CBDT is the sole authority to formulate rules under the Income Tax Act.
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.