Tax Book 2023

Income From Salary Chapter- 07

Loan provided at: Amount to be included in the salary of the

employee:

Interest free loan, or no profit on interest is

charged

Interest computed at benchmark rate.

0%, less than the bench mark rate, equal to

benchmark rate.

Interest computed at benchmark rate, less actual

amount paid by employee on account of loan.

Higher than the benchmark rate OR Amount of

loan is equal to or less than Rs. 1,000,000.

Nothing shall be included.

The benchmark rate in tax year 2003 was 5% p.a. (with 1% increase in each following tax year and in

2012 it was 14% p.a. as defined in section 12(14). From tax year 2013 to onwards benchmark rate

has been capped at 10%.

However, with effect from tax year 2011 such benefit shall not be taxable in cases where such

benefit is extended by the employer due to the waiver of interest by such employee on his accounts

(e.g. provident fund etc) maintained with the employer.

Example: Inaam is an employee in a group of companies. He derived following income during the

income year July 1, 20 22 to June 30, 202 3.

Salary income per month Rs.

(i) Basic salary Rs. 20,000

(ii) House rent allowance Rs. 8,000

(iii) Utility allowance Rs. 1,000

He is provided with a 1,000CC car, which is partly used for company’s business (Cost of car is Rs.

1,000,000). He has also obtained loan from the employer. Calculate his taxable income in the

following cases:

a) Amount of loan is Rs. 1,000,000 and interest charged by the employer is 7% p.a.

b) Amount of loan is Rs. 1, 1 00,000 and interest charged by the employer is 0 % p.a.

c) Amount of loan is Rs. 1,100,000 and interest charged by the employer is 6% p.a.

d) Amount of loan is Rs. 1,100,000 and interest charged by the employer is 11% p.a.

Solution:

Computation of taxable income Case (a) Case (b) Case (c) Case (d)

Rs. Rs. Rs. Rs.

Basic salary (20,000 x 12) 240,000 240,000 240,000 240,000

House rent allowance (8,000 x 12) 96,000 96,000 96,000 96,000

Utility allowance (1,000 x 12) 12,000 12,000 12,000 12,000

Company car benefit (Rs.1,000,000 x 5%) 50,000 50,000 50,000 50,000

Interest free loan (Note 1) - 110,000 44,000 -

Taxable income 398,000 50 8,000 442 ,000 398,000

Note 1: (Interest free loan)

Case a:

When the amount of loan is Rs. 1,000,000 or less, nothing shall be included in taxable

income.

Case b:

Interest calculated at bench mark rate shall be included in taxable income i.e.

1,100,000 x 10%.

Case c:

Amount to be included in taxable income is calculated as