Supreme Court says interest-free loans given to bank employees are taxable benefits
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The Supreme Court has ruled that the interest-free or concessional loans extended by banks to their employees are “fringe benefits” and is liable to be taxed. This decision, seen as a major setback for bank employees, upholds income tax regulations regarding such benefits.
“Fringe benefits” refer to additional advantages or perks beyond an employee’s regular salary. These benefits are considered supplementary to the primary compensation package and are typically provided by the employer as incentives or rewards for employment.
In this case, the interest-free or concessional loans offered by banks to their employees are classified as fringe benefits, as they represent an extra benefit associated with the employee’s position within the bank.
The Supreme Court’s decision means that these fringe benefits are subject to taxation.
The court, while upholding the tax rule, emphasised the unique nature of these benefits to bank employees, considering them as perquisites inherently linked to their employment.
Justices Sanjiv Khanna and Dipankar Datta, presiding over the case, clarified that these benefits are distinct from ‘profit in lieu of salary,’ as they are additional advantages provided due to employment status.
The ruling comes amidst a series of appeals filed by various bank staff unions and officers’ associations challenging the taxation rules.
The bench explained that the employer’s provision of interest-free or concessional loans constitutes a fringe benefit and perquisite, aligning with common understanding and usage of these terms.
Addressing concerns about arbitrariness in the rule, which linked the taxation of such benefits to the State Bank of India’s (SBI) interest rates, the court defended the decision.
It noted that setting SBI’s interest rate as a benchmark ensures clarity and consistency, preventing unnecessary litigation.
Given SBI’s status as India’s largest bank, its interest rates significantly influence those of other banks, justifying its use as a benchmark.