Loans and Salary Advance overview
Salary advance or other types of loans can be given by employers to their employees. EazeWork provides comprehensive features to manage these loans.
There are two system defined loans which can be used
1. Salary Advance : interest free salary advance can be given to employees, there is not tax liability.
2. Medical Loan - Specified Diseases : if a medical loan is taken for a specified disease for an employee or for a family member then also there is no perquisite tax on the loan as long as the treatment is being done in a government approved hospital. Reimbursement received from insurance will however attract perquisite tax. List of specified diseases is - AIDS, Allergic Manifestations, Cancer, Chronic Renal Failure, Hemophilia, Neurological Disorders, Parkinson's disease, Tuberculosis.
There are two types of loans -
Loans without perquisites : these are loans given without charging any interest from employee
Loans with perquisite : these are loans where employer charges an interest from employee
To manage this process you will need to
1. Setup loan heads which you want to provide to your employees - refer article
2. Setup the process for loan request and approval - refer article
As per Indian Income tax laws if an employer gives a loan at an interest rate
which is less than the market interest rate then perquisite value is applied
on the loan. Refer to write-up on
Loans with perquisite for details on loans which are a part of perquisite taxation rules
Only Salary Advance can be taken by Retainers and Trainees. Subcontractors cannot take any loan.
Please note that home loan taken by employee from a bank or financial institution is separate from these loans. Refer to the article on Tax Benefit of Home Loan for more details.
Loans are automatically recovered in payroll based on the monthly recovery amount
but if an employee wants to prepay the amount he can do so. Refer to article
on Prepayment of loans for more details. If there is outstanding loan and employee's separation is approved then the total outstanding amount is recovered in the full and final. If the loan is having an interest component then interest is charged till the end of month; i.e. if last working day is 20-July-2024 then interest is charged till 30-Jun-2024 in the full and final recovery.
As per law if outstanding loans (excluding Salary Advanced and Medical loan) exceed INR 20,000 then there will be a perquisite tax applicable on the loan. This feature can be enabled from payroll setup.
Other articles -
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