Top Stories Interest Free or Concessional Loans to Bank Employees Are Taxable under Income Tax Rules as Perquisite: Supreme Court [Read Judgement] It was observed that the employer’s grant of interest-free loans or loans at a concessional rate will certainly qualify as a ‘fringe benefit’ and ‘perquisite” and held that grant of an interest-free loan or loans at concessional rate would qualify as perquisites or fringe benefits. By Yogitha S. Yogesh – On May 18, 2024 11:29 am – 2 mins read The Supreme Court held that Interest Free or Concessional Loans to Bank Employees Are Taxable under Income Tax Rules as Perquisite under Section 17 of the Income Tax Act, 1961.s

All India Bank Officer’s Confederation, the appellants had challenged the vires of Section 17(2)(viii) of the Income Tax Act, 1961 (Act) and Rule 3(7)(i) of the Income Tax Rules, 1962 (IT Rules) through various writ petitions before the Madhya Pradesh High Court and Madras High Court which were dismissed by the High Courts. Section 17(2)(viii) of the Income Tax Act defines perquisites and states that it includes an ‘any other fringe benefit or amenity as may be prescribed’. Rule 3 of the IT Rules provides the additional fringe benefits or amenities which are taxable as perquisites.

Rule 3(7)(i) of the IT Rules provided that interest-free/concessional loan benefits provided by banks to bank employees shall be taxable as ‘fringe benefits’ or ‘amenities’ if the interest charged by the bank on such loans is lesser than the interest charged according to the Prime Lending Rate (PLR) of the State Bank of India (SBI). Section 17(2)(viii) and Rule 3(7)(i) were challenged on the grounds of excessive delegation of essential legislative function to the Central Board of Direct Taxes (CBDT). Rule 3(7)(i) was also challenged as being violative of Article 14 of the Constitution since it provides PLR of SBI as the benchmark instead of the actual interest rate charged by the respective bank from a customer on a loan. A two judge bench of the Supreme Court comprising of Justice Sanjiv Khanna and Justice Dipankar Datta observed that there was a twofold effect of Rule 3(7)(i) i.e. the value of interest-free or concessional loans is to be treated as other fringe benefit or amenity for the purposes of Section 17(2)(viii).

Secondly, it prescribed the method of valuation of the interest-free/concessional loan for the purposes of taxation. The court observed that Section 17(2)(viii) was enacted as an “an enabling catch-within-domain provision”. In light of decisions the Court viewed that ‘perquisite’ is a fringe benefit attached to the post held by the employee unlike ‘profit in lieu of salary’, which is a reward or recompense for past or future service. It is incidental to employment and in excess of or in addition to the salary. It is an advantage or benefit given because of employment, which otherwise would not be available. It was observed that the employer’s grant of interest-free loans or loans at a concessional rate will certainly qualify as a ‘fringe benefit’ and ‘perquisite” and held that grant of an interest-free loan or loans at concessional rate would qualify as perquisites or fringe benefits.