Example of Valuation of Concessional Loan Interest


Example of Valuation of Concessional Loan Interest

Valuation of Concessional Loan Interest Sections and Explanation.

Example:
Details of Mr X. the employee for the Financial Year 2012-13 are as follows:
Loan given by employee                       Rs. 5,00,000
Interest Paid                                                              Nil
SBI Rate as on 01.04.2012                               12%
SBI Rate as on 01.04.2013                               13.5%
Calculate the value of Interest taxable under the head salary under the lights of rule 3(7)(i) of The Income Tax Act.
Solution:
Interest as per rule 3(7)(i)(Note 1)                                           Rs.60,000
                Less:  Interest actually paid at concessional rate/                                     NIL
                  &n

bsp;             Nil interest paid                                                                                                 .

                  Taxable Amount under the Head Salaries                                    Rs.60,000

Note 1:

Interest as per rule 3(7)(i) = 5,00,000 *  12% = Rs. 60,000.
Here the rate of Interest on the First day of previous Year is to be considered so Rate as on 01.04.2012 i.e. 13.5% is to be ignored.
=============================================
Valuation of Concessional Loan Interest Sections and Explanation.
Extension of example:
          Interest paid by Mr. X to the employer on all the loans @ 7%
          Mr. X. has repaid Rs. 3,00,000 as on 01.09.2012
          Mr. X received a car Loan from his employer Rs. 1,50,000 as on 05.12.2012
          SBI Interest Rate on Car Loan as on 01.04.2012 is 11.5%
Calculate the value of Interest taxable under the head salary under the lights of rule 3(7)(i) of The Income Tax Act.
Solution:
Interest as per rule 3(7)(i)(Note 1)                                             Rs. 44,750
                Less:  Interest actually paid at concessional rate/                                Rs. 26,250
                                Nil interest paid                (Note 2)                                                                    .
                  Taxable Amount under the Head Salaries                                     Rs.18,500
Note 1: Interest as per rule 3(7)(i) :
Months
Maximum O/s Balance
Calculation
Interest
Pers

onal Loan

Car Loan
April to August
500000
= 500000*12%*5Months/12
25000
September (500000-200000)
200000
= 200000*12%*1Month/12
2000
October to November

200000
= 200000*12%*2Months/12
4000
December to March
200000
150000
=[200000*12%*4Months/12]+
   [150000*11.5%*4Months/12]=8000+5750
13750
Total
44750
Note 2: Interest actually paid at concessional rate/ Nil interest paid: Paid @ 7% on all loans
Months
Maximum O/s Balance
Calculation
Interest
Personal Loan
Car Loan
April to August
500000
= 500000*7%*5Months/12
14583
September (500000-200000)
200000
= 200000*7%*1Month/12
  1167
October to November
200000
= 200000*7%*2Months/12
 2333
December to March
200000
150000
=[200000*7%*4Months/12]+

   [150000*7%*4Months/12]=4667+3500

 8167
Total
26250

=========================================

Valuation of Concessional Loan Interest Sections and Explanation.
  

Exceptions to Loans considered in Rule 3(7)(i):
         When the employee has taken a loan from employee for medical expenses for specified diseases as per rule 3A, then even if the employee does not pay any Interest on such loan, It is not considered as perquisite in the hands of employees and such interest not paid is not taxable as in the above case
         Specified diseases as per Rule 3A(2) are:
a)      cancer;
b)      tuberculosis;
c)       acquired imm

unity deficiency syndrome;

d)      disease or ailment of the heart, blood, lymph glands, bone marrow, respiratory system, central nervous system, urinary system, liver, gall bladder, digestive system, endocrine glands or the skin, requiring surgical operation;
e)       ailment or disease of the eye, ear, nose or throat, requiring surgical operation;
f)        fracture in any part of the skeletal system or dislocation of vertebrae requiring surgical operation or orthopaedic treatment;
g)       gynaecological or obstetric ailment or disease requiring surgical operation, caesarean operation or laperoscopic intervention;
h)       ailment or disease of the organs mentioned at (d), requiring medical treatment in a hospital for at least three continuous days;
i)         gynaecological or obstetric ailment or disease requiring medical treatment in a hospital for at least three continuous days;
j)         burn injuries requiring medical treatment in a hospital for at least three continuous days;
k)       mental disorder – neurotic or psychotic – requiring medical treatment in a hospital for at least three continuous days;
l)         drug addiction requiring medical treatment in a hospital for at least seven continuous days;
m)     anaphylectic shocks including insulin shocks, drug reactions and other allergic manifestations requiring medical treatment in a hospital for at least three continuous days.
          In case where, the Loan is taken by an employee for the medical expenses and if the amount is less than Rs. 20,000, then it is exempt from tax on Interest which is the balance of the interest at SBI Rate and the Interest actually paid by the employee.
          When the employee has received loan from employer for medical treatment for specified disease as per rule 3A, and if the employee receives any reimbursement is made by the insurance company than such amount will not be allowed for exemption. Let us understand the same with an example:
==================================================
Valuation of Concessional Loan Interest Sections and Explanation.
Example:
Details of Mr X. the employee for the Financial Year 2012-13 are as follows:
Loan given by employee for specified disease as per Rule 3A                                       Rs. 2,00,000
Loan given by employee for Medical Treatment                                                                  Rs. 22,000
Interest Paid                                                                                                                                                 Nil
SBI Rate as on 01.04.2012                                                                                                                        12%
Reimbursement by Insurance Company for specified Disease on 01.12.2012          Rs. 80,000
Repayment of Loan by employee for Medical Treatment on 01.02.2012                    Rs. 10,000
Calculate the value of Interest taxable under the head salary under the lights of rule 3(7)(i) of The Income Tax Act.

Solution:

Interest as per rule 3(7)(i)(Note 1)                                           Rs. 4,650
                Less:  Interest actually paid at concessional rate/                                         NIL
                                Nil interest paid                                                                                           .
                  Taxable Amount under the Head Salaries                                     Rs.4,650
Note 1: Interest as per rule 3(7)(i) :
Months
Maximum O/s Balance
Calculation
Interest
Specified Disease
Unspecified Disease
April to November
NIL
22000
= NIL + 22000*12%*8Months/12

1760
December to January
80000
22000
= [80000*12%*2Months/12]+
   [22000*12%*2Months/12]=1600+440
2040
February
80000
12000
(22000-10000)
= [80000*12%*1Month/12]+
   [12000*12%*1Month/12]=800+120
  920
March

80000
12000
= [80000*12%*1Month/12]+
   [12000*12%*1Month/12]=800+120
  920
Total
4650

Explanation:

          Rs 2,00,000 Loan given for specified disease as per Rule 3A is exempted but any reimbursement by the insurance company is not allowed as exempt so Interest on Rs. 80,000 received as reimbursement from insurance company is taxable.
          It is said in the Act that if the medical Loan taken by an employee for unspecified disease is less than Rs.20000 than interest on such loan is not taxable as per Rule 3(7)(i).

–          In the above example, Maximum balance at the end of the month February of Loan for unspecified  disease becomes Rs. 12000, which is less than Rs.20,000, but still Interest on same is taxable because the original Loan amount is more than Rs. 20,000 i.e. Rs. 22,000.

Valuation of Concessional Loan Interest Sections and Explanation.

Leave a Reply

Your email address will not be published. Required fields are marked *

Tax Finance info © 2016 Frontier Theme