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On March 23, 1995, the Central Board of Direct Taxes (for short the “C. B. D. T.”), informed the Chief Commissioner of Income-tax, Hyderabad, that where the employer directly bears a part of the interest burden of the employees by reimbursing a portion of the interest payable by the employee in respect of building loans, such reimbursement is taxable as income from ‘‘salaries’’. In other words the perquisite is chargeable only in case the employee has originally incurred an obligation in favour of a lending institution such as HDFC etc. Cases where the employer has directly advanced loans to its employees either as interest free or concessional should not result in any benefit for the following reasons:

a) The employee is under no obligation to pay interest or has obligation only to pay a certain interest;
b) The loan facility is extended as staff welfare to all the personnel.

The attempt in the new rule to tax such staff welfare measures must be countered on the basis of corresponding claims for deduction of such notional income under the head “ income from house property” as interest expenditure deduction. Further it would be wrong to consider such loans as providing any benefit in as much as the employee is required to serve the employer for a specified period and in case of early departure is made subject to charge of interest on retrospect basis. In true effect therefore the benefit that is being made subject to tax under the new sub rule is a contingent benefit, which can be taxed only on the happening of such contingency.

Employers are advised to redraw their housing loan schemes to so specifically include a clause for payment of interest at par with the market rate of interests. Further the scheme should also provide that no interest would be charged if the employee serves the company for a particular period. In case of early exit the interest shall be charged retrospect basis. This would have two advantages:

1) The loans would become interest bearing. Hence no perquisite. Employer may have to justify such interest as a mere contingent income under the scheme.
2) In the alternate if the assessing officer so chooses to tax it as benefit the employee could take a deduction u/s 24 for the equivalent sum for a specific mention of interest clause in the scheme perse.

Remember it is not possible to conclude that no perquisite will be charged as well as a deduction can be clamed as that would be inconsistence with the law.

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