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:

Depreciation allows you to spread the cost of a capital asset over its useful life. Under the Income Tax Act, this deduction is primarily governed by Section 32, and the most common method used is the Written Down Value (WDV) method. Here’s a straightforward guide on how to calculate it:

Step 1: Determine the Cost of Acquisition

• Starting Point:
  Begin with the purchase price of the asset. Add any incidental expenses (like installation, transportation, and registration fees) that are directly attributable to acquiring the asset. This gives you the asset’s total cost.

Step 2: Classify the Asset

• Type of Asset:
  Assets are generally classified as tangible (buildings, machinery, vehicles) or intangible (patents, copyrights).

• Depreciable vs. Non-Depreciable:
  Note that certain assets, such as land and goodwill (as per current provisions), are not eligible for depreciation.

Step 3: Choose the Appropriate Depreciation Method

• Written Down Value (WDV) Method:
  Under this method, depreciation is calculated on the remaining value of the asset after deducting depreciation claimed in previous years.

  • Calculation for the Year:

    Depreciation=(Cost of Asset−Accumulated Depreciation)×Prescribed Rate\text{Depreciation} = (\text{Cost of Asset} – \text{Accumulated Depreciation}) \times \text{Prescribed Rate}Depreciation=(Cost of Asset−Accumulated Depreciation)×Prescribed Rate

• Straight-Line Method (SLM):
  In certain cases (like some power generation undertakings), the Straight-Line Method is applicable, where depreciation is spread evenly over the asset’s useful life.

Step 4: Apply the Prescribed Depreciation Rate

• Rate Determination:
  The Income Tax Act specifies different rates for various types of assets. For example, buildings, machinery, and computers each have their own rates.

• Example:
  If a machine costs ₹10 lakh and the prescribed rate is 15% under the WDV method, the first year’s depreciation would be:

  ₹10,00,000×15%=₹1,50,000₹10,00,000 \times 15\% = ₹1,50,000₹10,00,000×15%=₹1,50,000

  The Written Down Value at the end of the first year would then be:

  ₹10,00,000−₹1,50,000=₹8,50,000₹10,00,000 – ₹1,50,000 = ₹8,50,000₹10,00,000−₹1,50,000=₹8,50,000

  In the second year, you’d calculate depreciation on ₹8,50,000 using the same rate.

Step 5: Record and Carry Forward

• Documentation:
  Maintain detailed records of the asset’s cost, the depreciation claimed each year, and the resulting Written Down Value.

• Continuity:
  These records ensure that the depreciation is correctly calculated over the asset’s useful life and help in future tax assessments.