Employee loan agreement - What is the preferred interest rate as per latest act? - CiteHR
Dinesh Divekar
Business Mentor, Consultant And Trainer
Tsivasankaran
Consultant
+1 Other

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We are an IT company and we would like to introduce employee loan agreement for our employees. What is the preferred interest rate as per latest act?
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Dear member,
In many companies, when loan is given to the employees, they do not charge any interest. However, they just restrict the loan amount to the one month's gross pay and repayment is done in maximum 5 instalments.
Few companies link the payment of instalments to the length of service. Higher the length of service more the instalments with maximum being ten.
Your primary query is on charging the interest on the loan amount. However, may it be noted that if you give loan with interest, the interest has to be lower than what banks or authorised financial institutions charges. If the interest is low then only it can be considered as soft loan. However, it will increase your administrative burden also. Therefore, my recommendation is telling employees to take loan from the bank and you may pay interest part of the loan for the first few months. Again for this arrangement also, you need to have an exclusive agreement. However, in the agreement you may include a clause that company will the interest provided employee has works for at least 20 working days. Otherwise, the company will take responsibility for the payment of the portion interest that month. By chance if the employee separates, whatever reasons may be, the company will not pay the part of instalment after the separation.
In case, if you enter into the agreement as suggested above, then amount disbursed will become taxable amount. Therefore, the portion of EMI has to be routed through monthly payslip.
Lastly about maintaining anonymity. If you wish to get advice from seniors, then courtesy demands disclosure of your name and designation. The kind of query that you have raised does not merit protection of identity. You could have been heedful on this count.
Thanks,
Dinesh Divekar
To my knowledge there is no legislation which covers interest rates for employees . You can check comparable organisations to bench mark
With my fifty years of experience, I can tell that varies from 0% to 12% I never came across with rates more than 12$ in my service even when market rates were as high as 18% in 1980s and 90s
T Sivasankaran
To best of my knowledge the interest is charged as per the provisions as laid down by the RBI. Further except a financial institution approved by the RBI, no such other institutional or individual are authorized to indulge in the loan business. If any employer is giving loan and is charging interest, it is bad in law as well as bad in fact. But on the other hand the employer can give advance to its employees as per its Company's policy; again the approval of advance is a discretionary power of the employer, no one can force the employee for giving advance.
Nevertheless, in case the employer itself is a financial institution, it can avail loan facility to its employees in a subsidized rate in approval from the RBI. And whereas in this case the employee will be treated as CUSTOMER!
And on the disclosure of identity; Please be bothered that you are taking free advice from the learned fraternity, which is normally charged by the freelancer, so not disclosing the identity may be a manner-less exhibition!
Thanks,
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