Government Affairs

Interest-Free Loan from Employer Held Taxable by Indian Court

The Income Tax Appellate Tribunal in Mumbai, India, held in a recent decision that if an employer provides an interest-free loan to an employee, the forgone interest is a taxable perquisite under Indian law.

Indian law includes provisions taxing fringe benefits (“perquisites”), but does not have an express provision relating to below-market interest loans.

In the case noted, the Indian tax authorities identified a loan from an employer to an employee on audit, and contended that the employer should have withheld income tax on the value of the foregone interest. However, the auditor arbitrarily applied an interest rate of 15%, contending that such a rate would be reasonable under the circumstances.

The company appealed within the Indian system, and eventually the case made its way to the Appellate Tribunal.

The Tribunal upheld the argument that the benefit of an interest-free loan is a taxable perquisite. However, it overturned the use of the 15% rate to determine the value. According to the tribunal, such an ad hoc determination is not correct. It instead applied the lower rate that is announced each 1 April by the State Bank of India for similar loans. 

Related: India Seeks Advice on Scope of New Law Taxing Digital Businesses

How This Impacts Mobility 

Interest free bridge loans are common in the relocation industry, and escape tax in the United States due to a regulatory exception to the below-market interest rules of the U.S. tax code. Such loans in India, however, have now been held to result in tax to the employee, and will require withholding. Any companies making such loans in India must begin to treat the benefit of the below-market interest as taxable wages.

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