Imagine getting a personal loan at a 5.5 per cent rate of interest or a car loan at 5 per cent. No bank offers such unbelievably low rates, but then they do not need to when there are indulgent employers to do so.
Till 2001, many employers offered interest free or concessional loans to their staff and these were considered perks of the job.
Though now taxed as perquisites, the loans you get from your employer may still work out far cheaper than a bank loan. There are, however, some cases where a bank loan works more to your advantage.
Let us see how one can decide when to opt for an interest-friendly loan from your employer or a tax-mitigating loan from the bank'
What's the difference
For a loan taken from the employer, the taxable perquisite amount is the difference between the interest calculated on the monthly closing balance of the employer's loan and the rate at which the State Bank of India (SBI) provides the same loan. The only exceptions to this rule are loans below Rs 20,000 or those provided for medical treatment of specified diseases.
Need a personal loan'
Let us suppose Srijita Mitra wishes to take a personal loan. If she takes such a loan from a bank, she would have to pay anything between 14 and 30 per cent as interest. On the other hand, her employer offers such loans at 5.5 per cent.
So, what does she save if she borrows from her employer' A three-year, Rs 2.5-lakh loan at 5.5 per cent means a monthly repayment of Rs 7,549.
If she takes the loan from a bank at even the lowest rate of 14 per cent, she would pay a monthly instalment of Rs 8,545. Even assuming that she falls in the highest tax bracket, she saves Rs 29,327 on her total outgo.
That red sports car...
A car loan from your employer works out almost as cheap, though banks do offer reasonably good rates on these loans. If you take a three-year Rs 2.5-lakh car loan from a bank, you may pay 9.5 per cent as interest, which works out to a monthly repayment of Rs 8,009. Your employer may give you the same loan at 5 per cent, which means a monthly repayment of Rs 7,493. Pay your tax at 30 per cent and you still save Rs 12,652.
A rooftop apartment
Now, you might have decided that since personal and car loans work out far cheaper if taken from your employer, taking a home loan from your employer is also the best option. After all, no bank or financial institution will give you a 15-20 year loan at 5 per cent.
But, in the case of home loans, the tax benefits available to such loans actually make it cheaper for you to take the higher interest bank loan.
Here's the catch
Assume you want a five-year loan of Rs 5 lakh. Your employer may charge 5 per cent, which works out to a monthly repayment of Rs 9,436. A bank, on the other hand, will take 7.75 per cent, which means monthly instalments of Rs 10,079. Over the five-year period, the difference on interest outgo is Rs 38,580, making the employer's loan far cheaper.
However, you cannot avail of the Section 80C rebate for principal repayment if you take a loan other than a bank loan subject to certain specified exemptions. And your loan is taxed as a perquisite, if you take it from your employer. This means that you end up paying around Rs 11,574 as tax.
On the contrary, on a bank loan, you can save almost Rs 1.5 lakh, simply because of the tax benefits. Thus, it appears that while personal loans and car loans are cheaper when taken from the employer; home loans are best from banks.
One has to keep in mind another important tax angle. Since the loan taken from your employer is taxed as a perquisite in your hands, the addition of the interest differential to your income could put you in a higher income slab or tax bracket, resulting in higher tax outgo.
Assume your annual taxable income is Rs 2.4 lakh and your tax bracket is 20 per cent. Now, you take a concessional loan from your employer, which adds Rs 12,000 to your income.
This means your annual taxable income is now Rs 2.52 lakh, thus putting you in the highest tax bracket of 30 per cent. Thus, be sure to find out exactly what you will have to shell out as tax before you opt for that cheap office loan.