Interest-Free Loans to PSB Employees Now Taxable; SC Ruling Rattles Bankers

In a significant decision, the Supreme Court has declared that the benefits enjoyed by bank employees, such as interest-free loans or loans at concessional rates, are taxable under the Income Tax Act. This verdict, while legally sound, has sparked dissatisfaction among bankers who argue against the fairness of the ruling.

(An X post describing the impact of the verdict.)

Court Upholds Taxability of Bank Employee Benefits

In a case titled All India Bank Officers’ Confederation Vs The Regional Manager, Central Bank Of India & Others, the Supreme Court addressed the taxation of benefits provided to bank employees, specifically focusing on interest-free or concessional rate loans. The court examined the compatibility of Rule 3(7)(i) of the Income Tax Rules, 1962 with Article 14 of the Constitution of India.

On May 7, a division bench of Justices Sanjiv Khanna and Dipankar Datta upheld the validity of Section 17(2)(viii) of the Income Tax Act, 1961, and Rule 3(7)(i) of the Income Tax Rules, 1962. According to these rules, interest-free or concessional loans provided by banks to employees are taxable as fringe benefits or amenities if the interest charged is lower than the State Bank of India's prime lending rate.

(A comment from the official X handle of All India Ex-Servicemen Bank Employees' Federation Uttar Pradesh.)

Bankers Unhappy

The Supreme Court's decision didn't sit well with bankers, sparking widespread discontent. Expressing their frustration on social media platforms, particularly on X, bankers lamented the perceived unfairness of the ruling. They argued that while bank employees face taxation on benefits like interest-free loans, counterparts in other sectors enjoy similar perks tax-free. Examples cited included free railway tickets for transport employees, complimentary phone connections for BSNL staff, and even free electricity for workers in the energy sector. This discrepancy fueled the bankers' dissatisfaction, highlighting a perceived disparity in tax treatment across different industries.

(A young banker expresses his discontent on platform X.)

Court's Rationale

The court differentiated between 'perquisite' and 'profit in lieu of salary', emphasising that perquisite is an incidental benefit attached to employment. It noted that such benefits are additional to salary and are provided because of employment, making them taxable under the law.

(Another X post from a banking handle expressing dissatisfaction.)

The Supreme Court dismissed petitions filed by the All India Bank Officers Confederation (AIBOC) and others, arguing against excessive delegation of legislative function to the Central Board of Direct Taxes. Additionally, the court rejected claims of arbitrariness and violation of Article 14 of the Constitution.

Benchmark Required: SC

While acknowledging concerns raised by petitioners regarding the use of the State Bank of India's prime lending rate as a benchmark, the court deemed it neither arbitrary nor unequal. It emphasised the need for a clear benchmark to prevent unnecessary litigation.

Despite opposition, the court upheld the legality of taxing these benefits, citing provisions under the Income Tax Act. This ruling sets a precedent for taxation policies within the banking industry, prompting reflection and potential future legal challenges.