The lower interest rate employer’s loan will attract tax; know the details


The lower interest rate employer’s loan will attract tax; know the details | Photo credit: iStock images

The second wave of the Covid-19 pandemic took a lot of people unprepared to face a health emergency in terms of financial preparedness. Those fortunate enough to have formal employment may have requested an overdraft or loan facility from their employer in order to meet their financial obligations in the event of a health emergency, if any.

According to the recent government notification, the financial assistance received for Covid-19 from the employer is tax-free in the hands of the employees. However, if financial assistance is received in the form of an employer loan, it will be taxable. Employees apply for loans from employers for various other needs such as child rearing, medical emergencies, marriage, etc. depending on company policies.

These loans can be offered by employers at a preferential rate or at zero percent depending on the policies of the company.

It should be noted that these concessional loans attract income tax as a perk in the hands of the employee. These are seen as savings in terms of lower interest rates that would otherwise be higher if used through outside channels.

The employer is likely to levy a withholding tax (TDS) on this income because it is part of the salary. However, if the employer fails to deduct the same amount, the employee is responsible for paying taxes on the same amount.

The tax on such income is calculated monthly on the outstanding loan on the last day of each month. Interest is calculated on this amount at the interest rate applied by the State Bank of India on the first day of the relevant financial year for a similar loan. For example, an educational loan, a car loan, a home loan or a personal loan. The balance is taxable in the hands of the employee as an indirect benefit.

However, there are exceptions to this rule. For example, an amount up to Rs 20,000 in total is not taxable. In addition, loans taken out for the treatment of illnesses in specified hospitals are also not taxable.

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