Loan to director
This query is : Resolved
Querist : Anonymous
Querist :
Anonymous
(Querist)
10 December 2016
Dear Experts
An individual is director in pvt. Ltd. Company say ABC pvt. Ltd the company has given the interest free loan to director Rs. 10 Lakh who is only director not share holder. Pls let me know in this scenario weather this
Loan amount shall be taxable in the hand of employee or not treating it as deemed dividend?
Thanks & Regards
Anmol Kumar
An individual is director in pvt. Ltd. Company say ABC pvt. Ltd the company has given the interest free loan to director Rs. 10 Lakh who is only director not share holder. Pls let me know in this scenario weather this
Loan amount shall be taxable in the hand of employee or not treating it as deemed dividend?
Thanks & Regards
Anmol Kumar
11 December 2016
Whether Director is an employee ? Whether the loan facility is available and actually given to other employees on same terms and conditions?
03 August 2024
When a private limited company provides an interest-free loan to its director, there are several considerations under both the Companies Act, 2013 and the Income Tax Act, 1961. Here’s a detailed explanation of how the loan should be treated:
### **1. Treatment Under the Companies Act, 2013**
**Section 185 of the Companies Act, 2013:**
- **General Prohibition:** Section 185 prohibits a company from providing loans, guarantees, or security to its directors, except under certain conditions. However, as per the Companies (Amendment) Act, 2017, these restrictions do not apply to private companies if the loan is provided to managing or whole-time directors, subject to compliance with Section 186 and other conditions.
### **2. Treatment Under the Income Tax Act, 1961**
**Taxability of Interest-Free Loan:**
- **Perquisite under Income Tax Act:**
- **Section 28:** An interest-free loan provided by the company to a director, who is not a shareholder, is not directly treated as deemed dividend under Section 2(22)(e) of the Income Tax Act.
- **Section 28(iv):** However, the value of the benefit arising from the interest-free loan is considered a perquisite under the head "Income from Salaries" if the director is an employee of the company. The perquisite is the difference between the interest that would have been charged at the market rate and the interest actually charged (which is zero in this case).
- **Calculation of Perquisite Value:**
- **Market Interest Rate:** The company needs to calculate the interest that would have been payable at the market rate on the principal loan amount (Rs. 10 lakh).
- **Perquisite Value:** This difference is treated as a perquisite and is taxable in the hands of the director as "Income from Salaries."
**Example Calculation:**
Suppose the market interest rate is 10%. For an interest-free loan of Rs. 10 lakh, the annual interest would be Rs. 1 lakh (10% of Rs. 10 lakh). This Rs. 1 lakh would be considered as a perquisite and taxable under the director’s salary income.
### **3. Deemed Dividend Treatment:**
- **Section 2(22)(e):** Deemed dividend provisions apply if a company provides a loan or advance to a shareholder who holds at least 10% of the voting power. Since the director in your scenario is not a shareholder, these provisions do not apply.
### **4. Compliance:**
**Income Tax Compliance:**
- **Director’s Tax Return:** The director must report the perquisite value of the interest-free loan in their income tax return under "Income from Salaries."
- **Company’s Compliance:** The company should ideally issue a Form 16 or include the perquisite details in the director's salary slip. The perquisite should be accounted for in the company’s tax records and reported appropriately.
### **5. Summary:**
1. **Taxability:**
- The interest-free loan provided to the director is treated as a perquisite under the Income Tax Act.
- The perquisite value is the difference between the market interest rate and the interest charged (which is zero in this case) and is taxable in the hands of the director.
2. **Deemed Dividend:**
- Since the director is not a shareholder, the loan does not fall under deemed dividend provisions.
### **Recommendations:**
- **For the Director:** Ensure that the perquisite value is included in the income tax return and the appropriate tax is paid.
- **For the Company:** Ensure that the perquisite is accounted for in the company’s financial records and reported in compliance with tax laws.
For precise and personalized advice, consulting a tax professional or a chartered accountant is advisable.
### **1. Treatment Under the Companies Act, 2013**
**Section 185 of the Companies Act, 2013:**
- **General Prohibition:** Section 185 prohibits a company from providing loans, guarantees, or security to its directors, except under certain conditions. However, as per the Companies (Amendment) Act, 2017, these restrictions do not apply to private companies if the loan is provided to managing or whole-time directors, subject to compliance with Section 186 and other conditions.
### **2. Treatment Under the Income Tax Act, 1961**
**Taxability of Interest-Free Loan:**
- **Perquisite under Income Tax Act:**
- **Section 28:** An interest-free loan provided by the company to a director, who is not a shareholder, is not directly treated as deemed dividend under Section 2(22)(e) of the Income Tax Act.
- **Section 28(iv):** However, the value of the benefit arising from the interest-free loan is considered a perquisite under the head "Income from Salaries" if the director is an employee of the company. The perquisite is the difference between the interest that would have been charged at the market rate and the interest actually charged (which is zero in this case).
- **Calculation of Perquisite Value:**
- **Market Interest Rate:** The company needs to calculate the interest that would have been payable at the market rate on the principal loan amount (Rs. 10 lakh).
- **Perquisite Value:** This difference is treated as a perquisite and is taxable in the hands of the director as "Income from Salaries."
**Example Calculation:**
Suppose the market interest rate is 10%. For an interest-free loan of Rs. 10 lakh, the annual interest would be Rs. 1 lakh (10% of Rs. 10 lakh). This Rs. 1 lakh would be considered as a perquisite and taxable under the director’s salary income.
### **3. Deemed Dividend Treatment:**
- **Section 2(22)(e):** Deemed dividend provisions apply if a company provides a loan or advance to a shareholder who holds at least 10% of the voting power. Since the director in your scenario is not a shareholder, these provisions do not apply.
### **4. Compliance:**
**Income Tax Compliance:**
- **Director’s Tax Return:** The director must report the perquisite value of the interest-free loan in their income tax return under "Income from Salaries."
- **Company’s Compliance:** The company should ideally issue a Form 16 or include the perquisite details in the director's salary slip. The perquisite should be accounted for in the company’s tax records and reported appropriately.
### **5. Summary:**
1. **Taxability:**
- The interest-free loan provided to the director is treated as a perquisite under the Income Tax Act.
- The perquisite value is the difference between the market interest rate and the interest charged (which is zero in this case) and is taxable in the hands of the director.
2. **Deemed Dividend:**
- Since the director is not a shareholder, the loan does not fall under deemed dividend provisions.
### **Recommendations:**
- **For the Director:** Ensure that the perquisite value is included in the income tax return and the appropriate tax is paid.
- **For the Company:** Ensure that the perquisite is accounted for in the company’s financial records and reported in compliance with tax laws.
For precise and personalized advice, consulting a tax professional or a chartered accountant is advisable.
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