17 November 2009
Sec 28 says that 'THe value of any benefit or perquisite, whether convertible into money or not arising from the business or exercise of a profession' is chargeable under the head profits and gains from business or profession
Keeping with concept. Will notional interest on interest free loans provided by the promoters, shareholders, other stakeholders categorised under unsecured loan be subject to tax in the hand of the company.
This question is intended to clarify whether my understanding of the act is correct or not and not specifically whether companies or other assesses do or do not charge if such interest if taxable as income in practice. Kindly bear that in mind when answering. Thank You
17 November 2009
Seems the second para is not properly framed. Promoters/shareholders/stakeholders are providing interest free loans to the company thereby eligibility of interest income, notional or otherwise, arises in their hands. On the other hand interest is an expense real/notional as far as the company is concerned. Then how can the company be assessed on the expense u/s 28. There arises my doubt raised in the ist sentence given herein above.
18 November 2009
My question arises because in income from salary where the employer provides an interest free loan excess of 20000 the notional interest in accordance with the SBI lending rate is taxable in the hands of the assessee.
As to your 1st point where the company does not charge interest to the employee it does not show as income as income does not accrue
Whereas the salaried employee is charged tax on notional interest which he never paid. It must be noted that interest is an expense for a salaried person whether notional or not. It is a monetory benefit and is taxed.
Keeping this in mind if would like to know if notional interest for interest free loans provided by the promoters, shareholders, other stakeholders categorised under unsecured loan be subject to tax in the hand of the company.
Sec 28 says that 'THe value of any benefit or perquisite, whether convertible into money or not arising from the business or exercise of a profession' is chargeable under the head profits and gains from business or profession
KINDLY SUBSTITUTE 'EMPLOYER' WITH THE 'LOAN PROVIDER' OR 'STAKE HOLDER' AND 'EMPLOYEE' WITH 'COMPANY'
I have heard that the character and nature of income is the criterion for chargeability and not mere receipt of funds. Hence Keeping in mind that income includes notional income I would like to know if the notional interest is chargeable to tax.
This question is intended to clarify whether my understanding of the act is correct or not and not specifically whether companies or other assesses do or do not charge such interest if taxable as income in practice. Kindly bear that in mind when answering. Thank You
23 July 2025
Your query revolves around **Section 28 of the Income Tax Act**, which deals with the **chargeability of profits and gains from business or profession**, and whether **notional interest** on **interest-free loans** provided by **promoters, shareholders, or other stakeholders** to a **company** would be subject to tax under this section.
### Understanding Section 28 of the Income Tax Act:
Section 28 of the Income Tax Act states that:
> "The value of any benefit or perquisite, whether convertible into money or not, arising from the business or exercise of a profession, is chargeable to tax under the head **profits and gains from business or profession**."
This means that any benefit (even if not realized in monetary terms) received by a business or professional person that arises from carrying on a business or profession is taxable under **profits and gains** from business or profession.
### Applying Section 28 to Your Query:
Your question seems to be centered on whether **notional interest** on **interest-free loans** given by promoters, shareholders, or stakeholders to a company can be treated as **taxable income** in the hands of the company under **Section 28**.
#### 1. **Nature of the Transaction**:
* A **loan** is a **liability** for the company, and any **interest** paid on it is typically a **deductible expense** for the company under **Section 37** (if it is an ordinary course of business).
* If the loan is **interest-free**, no **actual interest expense** is incurred by the company. However, the company still benefits from the loan (i.e., it can use the money without paying interest).
* **Section 28** refers to the value of **benefits or perquisites** arising out of business. The concept of **"benefit"** in this context could extend to a **notional benefit** arising from receiving an **interest-free loan** because the company is **saving on interest** it would otherwise have to pay in a market transaction.
#### 2. **Chargeability of Notional Income**:
* The **company** in this case does not pay interest on the loan, but it **saves** the interest that it would have paid in a normal arm's-length transaction. * Normally, **interest-free loans** result in a **financial benefit** for the company, which is in the form of **notional interest** that it does not have to pay. * **Notional income**, if it is a **realized benefit**, can potentially be taxed under the head **profits and gains from business**. However, this is a bit more nuanced because notional income is not always taxable unless **specifically provided for** in the Act.
#### 3. **Is Notional Interest Taxable?**
* In your query, you mention that **salaried employees** are taxed on **notional interest** under **Section 10(10D)** if they are provided an interest-free loan exceeding ₹20,000, based on the **SBI lending rate**. * However, this is **different from Section 28**, where **companies** are concerned. The taxation of **notional interest** is often based on the **nature of the transaction** and how it relates to the **business operations**.
#### 4. **Section 28 and the Company**:
* **Section 28** does not **explicitly** mention the taxation of notional interest on interest-free loans received by a company. * Generally, **benefits and perquisites** arising from business are taxable, but the specific taxability of **notional income** (like notional interest) is **not automatic** unless clearly **provided for** by the Income Tax Act.
#### 5. **When Would Notional Interest Be Taxable?**
* If the loan is provided by a **related party** (e.g., a promoter or shareholder), the **company** might be required to **recognize a notional interest** for transfer pricing purposes, particularly if the loan is provided **below-market rates**. Under transfer pricing rules, the **value of the benefit** (e.g., notional interest) could be imputed, but that would be **under specific provisions** rather than Section 28 directly.
* **In practice**, if there is no **clear provision** for taxing **notional income** in the hands of the company, the **company does not need to charge tax on the notional interest** for receiving interest-free loans. However, it is **important to consult a tax professional** or **the Assessing Officer** for specific cases, especially where the loans come from related parties.
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### Conclusion:
* **Section 28** would likely apply to **benefits and perquisites** arising from business activities, including **notional benefits** like the **savings on interest** from interest-free loans. * However, there is **no direct provision** under Section 28 to treat **notional interest** on interest-free loans as taxable income in the hands of the company unless **specifically provided** for under other provisions of the Act, such as **transfer pricing regulations**. * In practice, the **company would not be taxed** on the notional interest unless the loan is from a **related party** and falls under specific transfer pricing or related-party transaction rules.
CAclubindia
