Employer Loan Tax Rule in Income Tax Rules Draft 2026: SBI Rate Method Explained

Many Indian employees take small loans from their employer. Some take a salary advance for a medical need. Some take an interest-free loan for a vehicle, home renovation, education, or a personal emergency. These loans feel simple at the time of disbursal but income tax law treats them as a part of salary in a specific situation.

The key point is this an interest-free loan or a loan at a concessional interest rate creates a benefit for the employee. Income tax law calls such benefits perquisites. Once a benefit becomes a perquisite, it forms part of taxable salary and affects TaxDeducted at Source (TDS) and Form 16 reporting.

The Draft Income-tax Rules, 2026 set out this treatment under Rule 15: Valuation of perquisites, in Table IV. The rule uses the State Bank of India (SBI) lending rate as the benchmark to measure the benefit and compute the taxable value.

Is this rule new?

The SBI rate method for employer loans follows the established approach under the Income-tax Rules, 1962 where perquisite valuation for loans also uses SBI rate and monthly maximum outstanding. The Draft Rules, 2026 restate this approach within Rule 15.

So the major change is not the method. The change is the placement and consolidation in the new draft rules framework.

Where the draft rules cover employer loans

The employer loan rule sits in Draft Income-tax Rules, 2026, Rule 15(5)(a), Table IV, under the item “interest-free or concessional loan”.

Rule 15 covers perquisites and their valuation. Table IV covers “other benefits or amenities” and includes employer loans along with other benefits such as free food and gifts.

What makes an employer loan taxable

An employer loan becomes relevant for tax when:

• The employer charges no interest, or
• The employer charges interest lower than a benchmark market rate

In such cases, the difference between the benchmark interest cost and the interest paid by the employee is treated as the taxable perquisite value.

The draft rules fix the benchmark in a clear manner: the benchmark is the SBI rate for the same purpose.

The SBI rate method, step by step

The draft rules lay down a structured calculation.

Step 1: Identify the SBI rate for a similar loan purpose

The taxable value uses the SBI rate as on the first day of the relevant tax year for a loan taken for the same purpose.

This detail matters. It means payroll cannot use a mid-year rate change to compute a different value. The rule anchors the rate to the start of the tax year.

Step 2: Find the maximum outstanding balance for each month

The rule uses the maximum outstanding monthly balance.

This is not the opening balance or the closing balance. It is the highest principal amount outstanding at any point in that month. Payroll teams must track this number month by month.

Step 3: Compute interest at SBI rate on that monthly maximum

For each month, compute the interest cost using the SBI rate on the maximum outstanding balance for that month.

This gives the “market interest cost” under the tax rule.

Step 4: Reduce interest paid by the employee, if any

If the employee pays interest to the employer, that interest reduces the perquisite value. The rule states this reduction clearly.

Step 5: The balance is the taxable perquisite value

The remaining amount is the perquisite value that enters taxable salary.

Two exemptions where taxable value becomes nil

The draft rule provides two direct relief provisions for employer loans.

1) Small loans up to Rs 2,00,000

If the loan does not exceed Rs 2,00,000 in aggregate, the taxable value is nil.

This covers many salary advances and short-term employer loans.

2) Medical treatment loans for specified diseases

If the loan is for medical treatment for diseases specified in Rule 18, the taxable value is nil.

The draft rule also places an important condition: the nil value does not apply to the part of the loan that is reimbursed under a medical insurance scheme.

How this affects TDS, Form 16 and employee tax planning

TDS impact

Once a perquisite value is computed, it becomes part of salary for TDS calculation. The employer must include it when calculating monthly TDS on salary income.

Form 16 and reporting

Employers report perquisites in salary statements and Form 16. When the employer loan value is computed, it must flow into the employee’s taxable salary figure.

Employee planning

Employees who plan to take employer loans must check:

• Loan amount and whether it crosses Rs 2,00,000
• Interest rate charged by employer
• SBI rate reference for the loan purpose
• Repayment schedule, since monthly maximum outstanding drives the value

A structured repayment plan reduces maximum outstanding balances over the year, which reduces perquisite value.

Compliance checklist for employers and payroll teams

Payroll accuracy decides whether perquisite reporting stays clean. These steps support compliance under the draft rule:

1. Document loan purpose: The rule uses SBI rate for a similar purpose, so loan purpose tagging is required.
2. Lock SBI rate as of first day of the tax year: Payroll must use the correct rate date, not a later rate change.
3. Track maximum outstanding for each month: Payroll must capture the peak balance for every month.
4. Track employee interest payments: Interest paid by employee reduces perquisite value and requires accounting support.
5. Apply exemptions with documentation: For medical treatment loans, the employer must maintain support records and must check insurance reimbursements.

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