How is tax calculated on interest-free loans provided by my company (employer)?

If your company grants you an interest-free or concessional loan, it is treated as a taxable perquisite under Salary if the total loan exceeds ₹20,000, except in cases like medical treatment for specified illnesses. The tax is computed based on SBI rates and added to your gross salary.

✅ Relevant Legal Provisions:

• Section 17(2)(viii) of the Income Tax Act, 1961

• Rule 3(7)(i) of the Income Tax Rules, 1962

As per Section 17(2)(viii):

“Perquisite” includes the value of any other benefit or amenity provided free of cost or at concessional rate by the employer which is prescribed, having regard to the nature and cost thereof to the employer and the financial position of the employee.

Explanation: The provision includes concessional or interest-free loans as perquisites taxable under the head Salary.

🧾 Rule 3(7)(i) – How to Compute Taxable Value of Interest-Free Loan:

The value of the perquisite is calculated as the interest calculated at the rate charged by the State Bank of India (SBI) as on the 1st day of the relevant previous year for loans of similar type, minus the interest actually recovered from the employee.

🧮 How to Calculate Taxable Perquisite:

Perquisite Value=(Loan Amount×SBI Rate×No. of months)−Interest, if any, recovered from employee

• SBI Rate: As per prevailing SBI lending rate on 1st April of the financial year

• Loan Value: Opening balance at the beginning of each month

• Exemption: If aggregate loan amount is ≤ ₹20,000, no perquisite value is taxable

📘 Illustration:

• Loan Amount: ₹5,00,000 (interest-free)

• Date of loan: 1st April 2024

• SBI rate on 1st April 2024: 9% p.a.

• Interest recovered from employee: ₹0

Taxable Perquisite=₹5,00,000×9%=₹45,000

₹45,000 will be treated as salary income and taxed at slab rate applicable to the employee.

📌 Special Cases:

How is income tax calculated on LTC (Leave Travel Concession) or LTA (Leave Travel Allowance)?

✅ Relevant Legal Provisions:

• Section 10(5) of the Income Tax Act, 1961

• Rule 2B of the Income Tax Rules, 1962

📜 Bare Act Extract – Section 10(5):

“In computing the total income of a previous year of an individual, the value of any travel concession or assistance received by, or due to, him—
(a) from his employer for himself and his family;
(b) in connection with his proceeding on leave to any place in India—
shall be exempt from income tax subject to conditions prescribed.”

📜 Rule 2B – Conditions for Exemption:

1. The exemption is available only for travel within India.

2. The exemption applies to actual travel fare, not for other expenses like sightseeing, food, or hotel stays.

3. It can be claimed twice in a block of 4 calendar years (current block: 2022–2025).

4. Exemption allowed for:

   • Air travel (economy fare of national carrier)

   • Rail fare (AC first class)

   • Bus fare (deluxe class, if rail/air not available)

📘 Family Definition (Explanation to Section 10(5)):

Includes:

• Spouse

• Children (maximum of 2 children born after 1 October 1998)

• Parents, brothers and sisters wholly or mainly dependent on the employee

🧮 Tax Calculation – Step-by-Step:

🧾 Illustration:

• LTA received: ₹40,000

• Actual travel (AC train) fare for eligible family: ₹25,000

• Exemption allowed: ₹25,000

• Taxable Amount: ₹15,000

📌 Other Key Points:

• Proof of travel (tickets, boarding passes, etc.) must be retained.

• Unused LTC in a block? You can carry forward 1 travel to the next block, and claim it in the first year only.

• If LTC is encashed without travel, it becomes fully taxable.

✅ Conclusion:

Under Section 10(5) read with Rule 2B, LTA/LTC is exempt from income tax to the extent of eligible travel fare for journeys within India. Any excess amount or non-travel expenses reimbursed are fully taxable.

My children are getting benefit of free education in my employer’s institute? Whether it is chargeable to tax?

Yes, the value of free education provided by your employer to your children is considered a taxable benefit (perquisite) under the Income Tax Act.

As per Section 17(2)(v) of the Income Tax Act, read with Rule 3(5) of the Income Tax Rules:

• If your employer runs a school or has an arrangement with any educational institution to provide free or concessional education to your children, it is treated as a taxable perquisite.

• However, there is an exemption:
  ➤ If the cost of education per child does not exceed ₹1,000 per month, then the benefit is fully tax-free.

If the cook is provided by your employer for your personal use, the entire cost incurred by the employer becomes a taxable perquisite.

✅ 100% Taxable Perquisite Includes:

• Salary paid to the cook

• Other expenses such as food, accommodation (if provided), or any reimbursement

Under Section 17(2)(ii) of the Income Tax Act, the term “perquisite” includes:

“The value of any benefit or amenity granted or provided free of cost or at concessional rate by the employer to the employee.”

Further, Rule 3(3) of the Income Tax Rules, 1962 specifically covers the valuation of personal attendants, including cooks.

As per Section 17(2)(ii) read with Rule 3(1) of the Income Tax Rules, 1962, if an employer provides a rent-free house, the value of the perquisite is calculated as:

Step 1: Calculate Unfurnished Accommodation Value

If employer owns the house:

• 15% of salary (metro city)

• 10% of salary (cities with 10–25 lakh population)

• 7.5% of salary (other towns)

If house is on lease/rent:

• Lower of actual rent paid by employer or above % of salary

Here, “salary” includes:

Basic Salary + DA (if part of retirement benefits) + Bonus + Commission + All other taxable allowances

Step 2: Add Furniture Value (For Furnished Accommodation)

If the house is furnished, then the perquisite value is increased by:

10% per annum of the original cost of furniture
OR
Actual hire charges paid by employer, if furniture is taken on rent.

🪑 Furniture includes – TV, fridge, sofa, washing machine, air conditioner, etc.