EXPLAINED: Big Blow To Bank Employees! SC Says Interest-Free Loans Availed By Bank Staff Taxable

New Delhi: The recent Supreme Court ruling on bank employees getting interest-free or concessional loans is set to deal a major blow to the latter. SC in its ruling has said that such loans given by banks to their employees at zero interest or concessional loans will be subject to taxation as they are being categorized as "fringe benefits" or "amenities".

A bench of Justices Sanjiv Khanna and Dipankar Datta on May 7, 2024 said the benefit enjoyed by bank employees from interest-free loans or loans at a concessional rate is a unique benefit/advantage enjoyed by them. It is in the nature of a 'perquisite', and hence is liable to taxation.

"Rule 3(7)(i) posits SBI's rate of interest, that is the PLR, as the benchmark to determine the value of benefit to the assessee in comparison to the rate of interest charged by other individual banks. The fixation of SBI's rate of interest as the benchmark is neither an arbitrary nor unequal exercise of power. The rule-making authority has not treated unequal as equals. The benefit enjoyed by bank employees from interest-free loans or loans at a concessional rate is a unique benefit/advantage enjoyed by them. It is in the nature of a 'perquisite', and hence is liable to taxation, it said”

The ruling said "Rule 3(7)(i) of the Rules stipulates 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 of the State Bank of India."

How Are Fringe Benefit And Perquisite Being Defined?

'Fringe benefit' is defined as any of the various benefits received from an employer apart from salary, such as insurance, pension, vacation, etc.

Perquisite has been defined as 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.

SC Ruling Apt And Makes Economic Sense: Resurgent India MD

Jyoti Prakash Gadia, Managing Director at Resurgent India told Zee Media that the SC ruling is quite apt and makes economic sense. He said, "These loans generally take the form of either short-term loans given free of interest payable within a year out of monthly salary (called festival loans in certain banks) or loans are given on concessional interest for house building in the name of the staff members. These obviously imply lower expenses to the bankers than what they would have paid otherwise. The resultant lower expenses are akin to an indirect increase in income/earnings of the staff members of the banks and are therefore liable to be taxed as fringe benefits and perquisites."

Gadia adds, the contentions of the bank employees to treat such concessional facilities as non-taxable is thus not considered justified if taken from the right perspective.

"The Supreme Court decision is in the spirit of fair and equitable treatment for all the taxpayers and the bankers are not expected to receive any extra pecuniary tax benefits on concessional loans merely because of working in a financial entity that is in the business of lending."