I have made this mistake once before and thought I’d share my experiences. Here’s why I believe you should not opt for a loan from your employer:
- Any loan from your employer ties you to your job. You can’t come out until the loan amount has been cleared in full. You might argue that you can always ask your new employer to bear the loan. But where does that take you? From one chain to the next? Plus, I’m not sure if any employer today would be willing to bear existing loans.
- It’s psychologically debilitating to see your take home salary cut by the EMI (Equated Monthly Installment) amount on the loan even before it’s credited into your salary account. I used to end up getting frustrated when this continued to happen each month, but they served as a good reminder of my mistake and actually motivated me to get out of the situation.
- There’s a hidden cost. Though you do not actually pay any direct interest on the loan amount, the notional interest surfaces as a perquisite in your income tax calculations and adds directly to your taxable income. I didn’t know this fact until I saw my income tax calculations; it was already too late.
With some fanatic fiscal steps, I managed to come out of this situation sooner than I thought it would take. I know I will NEVER repeat this mistake again. Once was good enough a lesson for me.
What do you think? Do you have an experience to share?
Further reading:
- Tip Tuesdays: Why You Should Opt for Employees’ Provident Fund (EPF) as Part of Your Salary if Your Employer Offers the Option
- How to Calculate the Income Tax Exemption on House Rent Allowance (HRA)?
- Awareness Fridays: Download Free Income Tax Information Booklets
- Tip Tuesdays: It’s Generally a Great Idea to Avoid Making Last-minute Investments Just Because they Help You Avoid Paying Income Tax
- Tip Tuesdays: Why You Should File Your Income Tax Returns Every Year?
{ 11 comments… read them below or add one }
On the contrary, it aint gonna be a bad idea if ur company sponsors u for an MBA and retakes u back @ managerial positions, that way you dont have to indulge in the process of job hunt, you get a position boost and a higher pay hike as well, dont forget you still have to pay EMI’s if you are not borrowing loans from your employer as you still have to borrow loans from any local or international banks,unless & until you are son/daughter of vijay mallya or lakshmi mittal who can finance ur education without loans, the end result may be the same in both cases, as in the former it may add some value to the position in your company..
@ your last point, you still have to pay income tax even if you are paying loans, but the tax paid will be much lesser, but the rest goes to loans asusual. I bel only way u can avoid tax in India is through real estate business..
It wont be a good idea though to borrow loans for education from your employer, if you don’t want to rejoin them or just waiting to get away from them for ever..
hi
can u explain explain exactly what does ur last point mean?
its quite confusing ….
Raj,
Suppose you take a loan of Rs 60,000 for one year from your employer. Your employer will deduct Rs 60,000/12 months = Rs 5,000 per month from your salary. The amount you have paid back to your employer at the end of one year is Rs 60,000, which means that you have paid zero interest. In effect, it’s a free loan.
Now, no loan in this world comes for free.
Therefore, a component called “notional interest” is added to your taxable income under a section called perquisites. Notional interest is the interest that you would have paid had you taken a loan from a commercial bank.
For simplicity, let us assume a notional rate of interest at 10% (simple interest). An amount = Rs 60,000 * 10% = Rs 6,000 gets added to your taxable income as a perquisite. You therefore have to pay tax on this “notional interest” component of Rs 6,000.
Hope this clears your confusion.
hi
thks for this, its quite clear now
but since it gets added to the taxable income,
u ll only pay tax on Rs. 6000 (say 600 @10% or 1200@20% depends on ur income)
which would be much lesser than the interest u pay
if u have taken the loan frm any commercial bank. right?
if i m wrong please clearify me
thks again.
That’s correct.
Hi raj u have taken simple interst to calculate notioanal intrest.what the kind of intrest banks actually going to calculate.also what is the actaul difference netween the tax paid and intrest paid to a bank would have been.suppose take the example raj has given above.
Hi Vinay u have taken simple interst to calculate notioanal intrest.what the kind of intrest banks actually going to calculate.also what is the actaul difference netween the tax paid and intrest paid to a bank would have been.suppose take the example raj has given above.
Is ti
“With some fanatic fiscal steps, I managed to come out of this situation sooner than I thought it would take”
How did you manage to?
Hi ,
My gross income is around 3Lacs p.a. and I pay Rs. 6K per month as rent . However, my company divides the complete income into Basic + FBP (fringe benefit pay)..there is no component in the salary as HRA. So the TDS is cut on the 6K which I pay as rent too. Can I claim that from IT deptt. at the time of filing ITR ?