Interest-Free Loan To Bank Staff Is Taxable As Fringe Benefit: Supreme Court

The Supreme Court has ruled that interest-free or concessional loans offered by banks to their employees are considered “fringe benefits” and are subject to taxation.

According to a report by ET, Justices Sanjiv Khanna and Dipankar Datta emphasised that the loan benefit availed by bank employees is distinctive to them, categorised as a “perquisite,” distinct from “profit in lieu of salary,” which serves as a reward or compensation for past or future services.

“Fringe benefits” denote supplementary advantages or perks beyond an employee’s standard salary. Employers typically provide these benefits as an extra incentive or reward for performance.

“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,” the bench said on May 7, adding the benefit was taxable under the income tax law.

Although the court upheld the income tax rule, it stated that the establishment of the State Bank of India’s interest rate as the benchmark was neither arbitrary nor an unequal exercise of power, the ET report added.

The court justified its decision, addressing concerns about the rule’s arbitrariness by explaining the connection between the taxation of these benefits and the interest rates of the SBI.

It observed that establishing the SBI’s interest rate as a benchmark ensures clarity and consistency, thus averting unnecessary litigation.

Considering SBI’s position as India’s largest bank, its interest rates hold considerable sway over those of other banks, thus validating its utilisation as a benchmark.

“By fixing a single clear benchmark for computation of the perquisite or fringe benefit, the rule prevents ascertainment of the interest rates being charged by different banks from the customers and, thus, checks unnecessary litigation,” the bench said.

The ruling comes amid a succession of appeals lodged by diverse bank staff unions and officers’ associations contesting the taxation regulations.

According to income tax regulations, interest-free or concessional loan benefits offered by banks to their employees are taxable as “fringe benefits” or “amenities” if the interest rate charged by the bank is lower than the interest rate set by the SBI’s prime lending rate.