Supreme Court deals major blow to bank employees! Interest-free loans declared ‘fringe benefits’, liable to be taxed
Supreme Court deals major blow to bank employees! Interest-free loans declared ‘fringe benefits’, liable to be taxed (Image-Freepik)
In a landmark ruling, the Supreme Court has termed interest-free or concessional loans extended by banks to their employees as “fringe benefits”, thus liable to be taxed as per income tax laws, according to a report.
An apex court bench comprising Justices Sanjiv Khanna and Dipankar Dutta said that these loans are unique in nature and “perquisite” unlike “profit in lieu salary”, so they are taxable, the report published in ‘The Economic Times’ said.
The bench, in a ruling on May 7, said that the benefit 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”.
This ruling has come in the wake of staff unions and officers’ associations of many banks challenging Section 17(2) (viii) of the Income Tax Act, 1962, on the grounds of constitutionality.
These associations were of the view that Rule 3(7)(i) was arbitrary and violated Article 14 of the Constitution by using SBI’s prime lending rate as the benchmark. On which, the bench upholding the Rule 3(7)(i) said the fixing of SBI’s interest rate as the benchmark was not “arbitrary” in nature or unequal exercise of power, the ET report said. Rule 3(7)(i) of the income tax laws deals with interest-free and concessional loans.
The enactment of “subordinate legislation for levying tax on interest free/concessional loans as a fringe benefit is within the rulemaking power under Section 17(2)(viii) of the Act. Section 17(2)(viii) itself, and the enactment of Rule 3(7)(i) is not a case of excessive delegation and falls within the parameters of permissible delegation”, the bench said.
The law clearly delineates the legislative policy and lays down standards for the rule-making authority, it said.
The rule-making authority has not treated unequal as equals, it 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,” the bench said.
Treatment of employees’ perquisite under tax laws
Under the income tax laws, an employer is bound to deduct tax on the ‘perquisite’ value offered to its employees. Perquisite comes under the head ‘salary’. If the employer fails to deduct tax on the same, it would be liable to pay penalty to the Income Tax Department.
In conclusion, employers are mandated to deduct tax at source (TDS) on the ‘perquisite’. Here in this case it is interest chargeable on the loan. However, there might be some exceptions regarding TDS deductions in certain cases.