The Supreme Court, in a significant ruling, has declared that interest-free or concessional loans provided by banks to their employees are to be considered as ‘fringe benefits’ and are therefore subject to taxation. This ruling, while ensuring fairness in taxation, also aims to prevent unnecessary litigation and provide clarity in taxation regulations.
In a report by ET, Justices Sanjiv Khanna and Dipankar Datta underscored that the loan facility availed by bank employees is a distinct “perquisite,” separate from “profit instead of salary,” which serves as a reward or compensation for past or future services.
“Fringe benefits” refer to additional advantages or perks beyond an employee’s salary. These can include company cars, health insurance, or even interest-free loans. Employers typically provide these benefits as an extra incentive or reward for performance.
“It is incidental to employment and over or in addition to the salary. It is an advantage or benefit given because of employment, which otherwise would not be available,” the bench stated on May 7, affirming that such benefits are taxable under income tax laws.
While upholding the income tax rule, the court clarified that adopting the State Bank of India’s interest rate as the benchmark was neither arbitrary nor an unequal exercise of power, as reported by ET. The SBI’s interest rate is used as a benchmark because it is widely recognized and stable, ensuring fairness in the taxation of fringe benefits across different banks.
The court justified its decision by addressing concerns about the rule’s arbitrariness, explaining the correlation between the taxation of these benefits and the interest rates of the SBI.
The Court, in its ruling, has brought clarity and consistency to the taxation of fringe benefits. Using the State Bank of India’s interest rate as a benchmark, the court has ensured that the computation of the perquisite or fringe benefit is clear and straightforward, thereby avoiding unnecessary litigation.
Given SBI’s status as India’s largest bank, its interest rates significantly influence those of other banks, validating its use as a benchmark.
The Supreme Court, in its ruling, has emphasized that the establishment of a single clear benchmark for the computation of the perquisite or fringe benefit is not only to prevent the need to ascertain interest rates charged by different banks from customers but also to curb unnecessary litigation. This decision is a testament to the court’s commitment to ensuring fairness and clarity in taxation regulations.
This ruling follows a series of appeals filed by various bank staff unions and officers’ associations challenging the taxation regulations.
According to income tax regulations, interest-free or concessional loan benefits provided 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.