iNTEREST FREE LOANS

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

05 July 2010 Dear Sir
What are the consequences , if a private limited company pays interest free advances of Rs 30 lacs to the relative of the director.

Pl. guide me

Thanks

DR GAURAV GUPTA FCA, FCS, LL.B

DR GAURAV GUPTA FCA, FCS, LL.B (Expert)
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05 July 2010 payment to director's relative can be disallowed if it is covered u/s 40A(2) how ever if director is also holding substantial shareholding and company is having accumulated profits then it can be covered u/s 2(22)(e)of income tax act

Querist : Anonymous

Querist : Anonymous (Querist)

05 July 2010 Dear Gaurav Ji
I am asking about the loan given but not the interest paid ( it is rather just opposite to the interest paid).

Can you highlight about the limit of advance paid and chargeability of notional interest or whether Section 299 of the Companies act applicability etc etc.

Further Section 2(22)(e) says about benificial owner of shares of atleast 10% himself not about relative of the benificial owner

Pl.guide me with suitable supporting

With Regards

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Asha Kanta Sharma online

Asha Kanta Sharma

(Expert)
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01 August 2024 When it comes to interest-free loans provided by a company to its employees or shareholders, several legal and tax aspects need to be considered. Here’s a detailed look at the relevant provisions and implications:

### 1. **Tax Implications of Interest-Free Loans**

#### **Taxation of Perquisite**

Under **Section 17(2)(vi)** of the Income Tax Act, 1961:
- **Interest-Free Loans**: If a company provides an interest-free loan to an employee, it is treated as a perquisite and taxed accordingly. The perquisite value is calculated based on the difference between the interest rate that would have been charged by the State Bank of India (SBI) and the actual interest charged by the company.

#### **Limits and Chargeability**

- **Aggregate Limit**: Section 17(2)(vi) applies to loans exceeding Rs. 20,000. For amounts below this threshold, the perquisite value does not need to be calculated.
- **Notional Interest**: The notional interest is calculated using the SBI rate for similar loans. This notional interest amount is then added to the employee's taxable income.

### 2. **Regulations Under the Companies Act**

#### **Section 299 of the Companies Act, 2013**

- **Disclosure of Interests**: Section 299 requires directors to disclose their interest in any company or companies or other association of individuals, and the nature of their concern or interest. This section ensures transparency and prevents conflicts of interest but does not directly impact the tax treatment of loans.

#### **Section 185 of the Companies Act, 2013**

- **Loans to Directors**: Section 185 of the Companies Act, 2013 restricts the company from providing loans to directors, or to any other person in whom the director is interested, except under certain conditions. This section would not directly apply to loans to employees unless they are also directors or relatives of directors.

### 3. **Section 2(22)(e) of the Income Tax Act**

- **Deemed Dividend**: Section 2(22)(e) addresses loans or advances given by a company to its shareholders who hold 10% or more of the company's shares. The section deems such loans or advances as dividends if they are not repaid within the prescribed time.
- **Beneficial Owner**: This section focuses on the beneficial owner of shares holding at least 10%, not their relatives.

### 4. **Practical Examples and Guidance**

#### **Example of Loan to Employee**
- If an employee receives an interest-free loan of Rs. 50,000, the perquisite value is calculated based on the difference between the SBI rate and the 0% rate charged by the company. For a loan of Rs. 50,000 and an SBI rate of 10%, the perquisite amount will be Rs. 5,000 (10% of Rs. 50,000).

#### **Alternative Approaches**

1. **Advance Salary**: If structured as advance salary, it is not a loan but rather an advance against future earnings. This can avoid perquisite issues but has its own implications on payroll and tax calculations.

2. **Grant or Welfare Benefit**: Offering a non-repayable grant or welfare benefit might be a viable alternative. However, it will still be subject to tax as a perquisite.

3. **Reimbursement or Bonus**: Providing the amount as a bonus or reimbursement of expenses, though taxable, avoids the complications of loan accounting.

### Conclusion

1. **Interest-Free Loan**: Such loans are taxable perquisites if they exceed Rs. 20,000. The perquisite value is calculated based on the difference between the SBI rate and the actual rate charged.

2. **Companies Act Compliance**: Section 299 requires disclosure of interests, and Section 185 restricts loans to directors. These sections ensure transparency and limit potential conflicts of interest.

3. **Deemed Dividend**: Section 2(22)(e) applies to shareholders holding at least 10% of shares and does not address loans to relatives.

4. **Alternative Solutions**: Consider alternative methods like grants, bonuses, or non-repayable benefits to avoid the complications of interest-free loans.

For specific situations and optimal tax planning, consulting with a tax advisor or legal expert is advisable to ensure compliance and efficient handling of such transactions.