Taxation of Interest-Free or Concessional Loans Provided by Employers as Perquisites

Under Section 17 of the Income Tax Act 1961, as amended by the Finance Act 2026, interest-free loans or loans given at a concessional rate of interest by an employer to an employee (or to specified household members of the employee) are treated as taxable perquisites under the head “Salaries.”

This article explains:

  • When such a perquisite is considered to arise
  • How to compute the taxable perquisite value
  • Specific exemptions (small loans and medical treatment loans)
  • Practical nuances, with examples and MCQs for quick revision

1. Concept: Why interest-free / concessional loans are taxed

When an employer advances an interest-free or low-interest loan, the employee enjoys a financial benefit as compared to an assessee who must borrow at market rates from a bank or financial institution. To ensure parity among employees and to bring such benefits within the tax net, the Income Tax Act includes this advantage as a perquisite.

Key principle: The difference between the interest calculated at the prevailing State Bank of India (SBI) rate for similar loans and the interest actually charged/recovered from the employee is treated as taxable salary perquisite.

2. When does the perquisite of employer loan arise?

A perquisite in respect of an employer-provided loan arises when all of the following conditions are met:

  • The assessee is in an employer–employee relationship with the loan provider
  • The loan is either interest-free or bears concessional interest (i.e., below the SBI rate for similar loans)
  • The loan is granted to:
    • The employee himself, or
    • Any member of the employee’s household

2.1 Purpose of the loan

Perquisite taxability does not generally depend on the purpose of the loan. Common purposes include:

  • Education of children or self
  • Medical treatment
  • Marriage in the family
  • Housing or renovation
  • Personal consumption or other personal needs

Except where a specific exemption is granted (notably certain medical treatment loans and petty loans up to a prescribed limit), such loans are treated as taxable perquisites.

2.2 Who is a “member of household”?

For purposes of this perquisite, “member of household” includes:

  • Spouse of the employee
  • Children of the employee and their spouses
  • Parents of the employee
  • Servants and dependants of the employee

If the loan is advanced to any of the above persons, it is treated as if the loan is given to the employee himself and the perquisite is taxable in the hands of the employee.

3. Method for computing the perquisite value

The Income Tax Rules prescribe a structured method to compute the taxable value of this perquisite. The computation is performed month-wise based on the outstanding loan balance.

3.1 Step-wise computation mechanism

The perquisite value for each financial year is determined through the following steps:

  1. Determine the monthly outstanding balance

    • For each loan, identify the outstanding principal as on the last day of each month during the financial year.
    • This needs to be done separately for every loan, if multiple loans exist.

  2. Apply the SBI interest rate

    • On the monthly outstanding balance, compute notional interest by applying the rate of interest declared by the State Bank of India on the first day of the relevant financial year for similar loans (e.g., housing loan, personal loan, education loan, etc.).

  3. Reduce actual interest recovered from employee

    • Subtract from the above notional interest any interest actually charged and recovered by the employer from the employee for that month.

  4. Resulting figure is taxable perquisite

    • The net figure after reduction in Step 3 represents the taxable perquisite value for that month.
    • Aggregate the monthly figures for all months of the year to arrive at the annual taxable perquisite.

Note: The benchmark rate is always the SBI rate on the first day of the financial year, irrespective of when the loan is actually disbursed.

4. Situations where employer loans are not taxed as perquisites

The law carves out important exemptions where interest-free or concessional loans are excluded from perquisite taxation. These relate to:

  1. Small (petty) loans up to a prescribed threshold