The Indian Tax Appellate Tribunal (ITAT) has said that interest-free loans extended by an employer to an employee is taxable for the employee under the head "perquisite." Interest-free loans or concessional loans that are often extended by employers is to be taxed as per specifications laid by the IT (income tax) act and not on an ad-hoc basis.

These points were brought to light by the ITAT in a recent ruling. Saraf, an employee had taken an interest-free loan from Teej Impex, a private company, and her employer.

Under the IT Act, 1961, the taxable value of the loan is calculated as follows:
1. Calculate the maximum outstanding balance of the loan as on the last day of each month.
2. Take the interest rate that would be charged by SBI for a loan taken for the same purpose as on the 1st of April of the year in which it was sanctioned.
3. Calculate interest of each month based on step 2.
4. Deduct actual interest recovered from the employee from step3 to arrive at the taxable amount.

Interest-free or concessional loans are free of tax if provided for medical treatment if specified diseases, provided no reimbursement was made under a medical insurance scheme. It is also tax-free if the amount of loan provided to the employee is less than Rs 20,000 a year.