Understand tax impact while taking loan from employer

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If one business has been more in demand, courtesy of the pandemic,  it is the business of loans. With many people unprepared financially to deal with the crisis, their last resort for rescue has been taking loans. That said, very few must be aware that one can also take at a concessional rate or an interest-free loan against salary from the employer.

As per the government’s direction, financial help received by employees from their employer for Covid will be tax-free in their hands. However, according to corporate policy, employers may also issue loans to employees for various additional financial needs, such as health emergencies, child education, higher education, and marriage.

Is the loan received by the employee taxable?

Any financial help obtained from the employer in the form of a loan will then be taxable to the employee. Employer-provided concessionary loans have tax implications as a perquisite. Employers may issue loans to employees at zero percent interest or concessional rates based on company-specific rules.

Then, income tax is levied as a perquisite on such concessional loans in the employee’s hands. The income tax department considers such concessional loans to be savings due to the low-interest rate, as obtaining a loan from a third party would entail a greater cost factor. For example, if you obtain a concessional loan from your company for Rs 10 lakh at a rate of say 5% and an identical loan is accessible in the market at a rate of say 8%, the interest disparity will be added to your perquisites as income, thereby raising your overall salary for tax purposes.

Understanding the meaning of perquisites

In a simple term, the ‘perquisite’ is a benefit that an employer provides to an employee based on his job title. For tax reasons, such a benefit is classified as a ‘salary.’ Similarly, an employer-provided interest-free or concessional loan is taxable as a ‘perquisite’ for an employee. As a result, the employer should deduct tax at source (TDS) on the loan’s interest as part of the employee’s income.

Points to note

-Employers are responsible for deducting tax on the value of ‘perquisites’ and remitting TDS to the government. If an employer fails to include a ‘perquisite’ in the employee’s ‘salary’ or fails to deposit TDS on the same, the employer will be liable for failure to deduct or deposit the tax.

-Employers that fail to include the ‘perquisite’ and fail to deduct tax at source are liable for interest at the rate of 1% per month from the date the tax was deductible to the date the tax was actually deducted.

-All taxable ‘perquisites’ are recorded on the employee’s Form 16. The employee is accountable for disclosing the ‘perquisite’ on their ITR. The ‘perquisites’ must be recorded separately from their ‘salary’ income.