## Interest-Free or Concessional Loans [Rule 3(7), sub-rule 1]

### Valuation basis

The benefit of an interest-free or concessional loan given to an employee or a family member is valued using the interest rate charged by the State Bank of India (SBI) on the same type of loan as on the first day of the relevant previous year.

### Computation

> Gross perquisite = SBI rate applied to the Maximum Outstanding Monthly Balance (MOMB)

> where MOMB = outstanding balance at the end of each month, less interest actually charged from the employee.

### Exemptions (no perquisite)

If the aggregate loan amount does not exceed ₹20,000, or
If the loan is for medical treatment of specified diseases — unless the amount is reimbursed under medical insurance.

Worked example

### Example 1

Concessional loan: Employer gives a ₹3,00,000 loan; outstanding at month-end is ₹3,00,000 throughout the year. SBI rate for that loan type = 11% p.a.; employer charges 4% from employee.

Perquisite = (11% − 4%) × ₹3,00,000 = ₹21,000 (on MOMB basis; here the balance is constant).

### Example 2

Small loan exemption: Employer gives a ₹15,000 interest-free loan. As the aggregate does not exceed ₹20,000 → Nil perquisite.

⚠️ Common exam mistakes

Using the lending rate at year-end instead of the SBI rate as on the first day of the previous year.
Computing interest on the original loan amount instead of the maximum outstanding monthly balance.
Forgetting to reduce the interest actually recovered from the employee.
Applying the ₹20,000 exemption per loan rather than to the aggregate outstanding.

Reference: Rule 3(7)(i) — Income-tax Rules, 1962

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Interest-Free / Concessional Loans [Rule 3(7)(i)]

Worked example

⚠️ Common exam mistakes