- What is an employee loan?
- When to give your employee a loan?
- Top 4 employee loan benefits
- Things to consider while offering employee loans
- Do companies give loans to employees?
- Are employee loans taxable?
- What is the difference between employee loans and salary advance?
- How to create an employee loans and salary advance policy?
- Interest-free loans to employees versus charging interest fee on loans provided to employees
What is an employee loan?
Employee loan can be defined as the money which is paid in advance by an organization to its employees in the form of financial assistance. It can be also said that a loan for an employee is the money that can be advanced by the organization for assisting in case of any emergencies.
Like all other loans, employee loans also have an interest rate and should be repaid as per the repayment schedule. The interest rates for employee loans are quite low which comprises small cost for loan administration and any tax liabilities if incurred by the employer.
When to give your employee a loan?
While providing loans to your employees, the policies and procedures should be very clear. Before you issue a loan for your employee, it is quite necessary to have a promissory note signed by your employees. This note would mention the payment amount, the frequency of payment, rate of interest, consequences in case of loan defaulters, etc.
Some of the major considerations which are important while lending an employee loan are mentioned below.
1. The situation in which the loan has been granted
The various circumstances in which loan has been granted is quite an important consideration. The loan was being granted for any specific reason or financial assistance? Are there any specific terms and conditions which are to be considered while granting an employee loan? Some of these questions are to be kept in mind while granting loans to employees.
2. The amount granted as loan
When you are going to grant employee loans, it is necessary to set the amount that will be granted to your employees as a loan. Certain considerations like how much amount would be granted a loan to employees, will the amount be fixed for all employees or it will depend on the salary of the employee, etc. should be decided on before granting loans to employees.
3. The term of the loan
Most of the employers usually offer loans to their employees for a shorter period such as two years or three years. This is because several complications can arise if the loan is being repaid for a longer period. If the loan is being repaid for a longer period, the maintenance of funds for granting loans becomes difficult. Also, the situation becomes critical if the employees plan to leave the organization without the loan being repaid.
4. Method of repayment
Usually, employers set the method of employee loan repayment to be by deductions made from the employee’s payroll.
What are the benefits of offering employee loans ?
Some of the major benefits which can be obtained by offering employee loans are mentioned below.
1. Method to reduce the financial stress of employees
By offering loans to your employees, you are helping your employees to get rid of their financial stress which can be a major reason for the low focus on work, absenteeism at the workplace and low productivity. So, by offering employee loans you are making a strategy for increasing the productivity of your organization in turn.
Read the complete guide to financial wellness for your employees
2. Employee retention strategy
Offering loans to employees is a very good retention strategy by which you will be able to reduce the turnover in your organization. When you are helping your employees with their financial issues, they will want to remain with you for a longer period rather than leaving the organization.
Want to know more ways to retain your employees. Get the Employee retention guide.
3. Enhance your reputation in the market
By granting employee loans, you are taking care of your employee’s well-being and this will be a factor enhancing your reputation in the competitive market.
4. Build an atmosphere of loyalty at the office
By the policy of granting loans to employees, your employees will remain loyal to you and will put in more effort into their work which will create a motivational atmosphere in the workplace.
3 Things to consider while offering employee loans
Granting loans to employees can be a problem in some cases as it might lead to some unprecedented situations in the business.
1. Multiple loan requests
When you are granting a loan to one of your employees, it is quite obvious that other employees would also put forward their requests for loans and you will have to consider them as well failing which can de-motivate the employees.
2. Repayment Issue
If you are granting loans for employees and your employees are not able to repay it on time, then it would become a critical situation for the organization. They might be facing financial struggles and will keep on extending the tenure of the loan. Some employees even might request for lowering of the interest rate. This type of negotiation and delays can affect your business and organization.
3. Loan Criteria
When you are offering loans to employees, you will check the financial condition of the employee before you grant the loan. If one of your employees has stable financial health, you can easily grant a loan for him and at the same time if you are refusing an employee loan to another employee who is not so financially stable; this will lead to discrimination issues at the workplace. This is not good for the overall well-being of your organization.
To avoid such major problems that can be associated with the granting of loans to employees, some basic precautions can be taken by you or some basic points can be kept in mind before granting a loan for employees.
- You should find out what is the cause behind your employee borrowing the money or applying for the loan. There can be some situations of emergency such as a medical emergency or any other personal emergency in which taking a loan is quite considerable.
- You should have a very clear employee loan program that must clarify the eligibility criteria and conditions under which granting loans for employees are feasible.
- You should remember about the promissory note which contains details about the loan re-payment and must get it signed by employees before granting them loans.
Do companies give loans to employees?
Companies give loans to their employees a certain rate of interest levied on the loan amount and with a commitment of repayment of the loan by the scheduled time. According to the Companies Act, 2013 there have been relaxations into the interest rates of the loan. In many cases, the need for approval from the company’s shareholders for granting loans for employees has also been removed.
In early times, the rate of interest levied in case of loans for employees was fixed to the yield from the Government securities. However, as per the guidelines of the new Act, the overall limit for loans to employees has been fixed and if there are any deviations then approval from the shareholders of the company is required. Moreover, it is also necessary for the companies to provide complete details about the loans for employees in their financial statements.
As an organization, this can turn out to be a good employment engagement mechanism. Data collected by the CPA shows that 80% of the employees would rather stick to an existing job with benefits rather than taking up a new job with more pay but no benefits. Similarly, more than 55% of employees are likely to opt for job that offers less pay but has a very sturdy benefits package. Should you choose to offer loan to your employees, you would be employing an engagement methods in a very subtle way.
Are employee loans taxable?
Loans to employees are taxable for the employees as a perquisite. A perquisite is defined as a benefit that can be offered by you as an employer to your employee based on the job designation of the employee. These benefits, when obtained by the employees, are taxable under the “Salary” head of the Income Tax norms. So, you should deduct the TDS (tax deducted at source) on the interest which is charged on this loan. In the case of interest-free loans to employees, they are even taxable as a “perquisite”.
- For this tax calculation, the outstanding balance of the loan is calculated at the end of each month.
- Then, the interest rate which will be applied would be the rate charged by SBI on the 1st of April of the year in which the loan was taken.
- Then the interest applicable to the loan amount for each month of the year would be calculated.
- From the total interest that has been calculated, the interest which has been recovered by the employer has to be deducted.
- The balance which is left out or the remaining balance will be the taxable amount as perquisite.
Employee loans can also be tax exempted under certain cases such as mentioned below.
- In case of the loan has been taken by the employee for the treatment of any of the diseases which have been listed under Rule 3A of the Income Tax Act, 1961. But, if the money has been received as a medical reimbursement under a health insurance plan of the employee.
- In case the loan amount which is granted is within Rs. 20,000 then it is not taxable.
- In the case of an employee who is having the voting power of 10% or more in the organization, then any loan which is taken by such an employee will be considered as a deemed dividend as per Section 2(22)(e). But, in these types of categories, even the interest which is levied on these types of payments is taxable as perquisite.
Obligations of an employer to provide loans
As far as employee loans are concerned, an employer doesn’t have much obligations from tax point of view. The Companies Act of 2013 governs such conditions and the amendment made on March 10, 2015 it allows companies to design policies under which they can offer loans and the details can be mentioned in the offer letter or job letter. However, the act prevents offering similar loans to the directors or shareholders. As an employer, it is also your responsibility to deduct applicable taxes on perquisite and deposit the TDS amount to the government.
Some organizations are known to offer interest free loans to their employees. Should you plan to offer anything similar, it is essential that you deduct taxes on the perquisite value of the loan that is interest-free. Failing to do so will attract penalties for the employees from the income tax department.
What is the difference between employee loans and salary advance?
Salary advance can be defined as a process by which a portion of the employee’s salary is being paid to the employee in advance. This can be illustrated with the help of an example.
For example, an employee in your organization is having a medical emergency and needs the salary of the current month in advance. You can pay a portion of his salary to him as salary advance and the remaining portion would be paid as per the pay dates of your organization. Mostly, the salary advances are re-paid in installments and these salary advances are interest-free.
Loans to an employee mean providing financial assistance to your employees at a minimal interest rate with a promissory note of loan repayment to be done on time. Loans for employees can be of a huge amount but since the interest rate is less as compared to the market rate this is a better and economical option for employees.
How to create employee loans and salary advance policy?
A written agreement or policy for loans to employees, salary advances and loans to employees’ interest rates is necessary.
- Loans and advance salary policy should consist of the terms and conditions associated with the loan and advance salary.
- The policy should clearly describe the eligibility criteria of the employees for obtaining an employee loan or a salary advance such as the employees should have completed their probation period, the employees should not have asked for a salary advance in the last 3 months, etc.
- A policy on employee loans and salary advance would also clearly mention the process involved in the granting of loan and salary advance such as filling up of the form for this purpose, provide the necessary details and submit the form with the HR.
- Moreover, this policy should also ensure that both employer and employee have the same understanding of the procedure involved in granting loans, salary advance and also the repayment of the loan.
- Your policy should also state the reasons or circumstances under which an employee can apply for a loan or for a salary advance such as any personal emergency, medical emergency, etc.Read more details about personal loans for salaried employees
Can a company give interest free loans to employees?
Interest-free loans are mostly provided by those organizations which have very good financial health and are thus are quite helpful in understanding the financial issues faced by their employees. If the organization is not sound financial and it is giving interest-free loans to its employees, then it is using its working capital for this purpose. Moreover, a lot of time and money of the organization would also be involved in the activities associated with the administration of the loan. Such circumstances are not good for the business of an organization.
Interest-free loans help the employees to sort their financial issues without the stress of interest being charged upon the loan amount. However, in case of charging interest fees on loans provided to employees the rate of interest is quite concessional or minimal. Both of these strategies will make your employees feel your concern towards them and would increase their loyalty towards your organization.
Moreover, interest-free loans when given to employees will lead to an increase in the brand value of the organization. It would enhance the reputation and the image of the organization in the market. Similarly, by granting loans for employees at concessional interest rates the reputation and brand value of the organization will also increase by some considerable amount. In both cases, there will be an increase in the goodwill of the organization.
Moreover, as said earlier interest-free loans and loans at minimal interest rates both are taxable. Both these categories of loans are taxable as a perquisite for an employee who is obtaining the loan.
Hence, when you are concerned about your employees and their well-being; you tend to understand their financial problems and grant them loans. However, while offering loans to employees you should think wisely about your actions, loans to employees interest rate, the impact of these actions on your business, how your actions will affect the work environment and your employees as well.