Rule 3(7)(i) benchmarking concessional employee loan perquisites to SBI rates is valid and constitutional.

By | November 6, 2026
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Rule 3(7)(i) benchmarking concessional employee loan perquisites to SBI rates is valid and constitutional.

Issue

Whether Rule 3(7)(i) of the Income-tax Rules, 1962, which values interest-free or concessional rate loans provided to bank employees as taxable perquisites based on SBI Prime Lending Rate, is constitutional and intra vires Section 17 of the Income-tax Act, 1961.

Facts

  • The assessees, employees of banking institutions, received interest-free loans or loans at concessional interest rates from their employer bank.
  • The Income-tax Department treated the interest differential between the employer’s concessional rate and the State Bank of India’s Prime Lending Rate (PLR) as a taxable perquisite under Section 17(2)(viii) read with Rule 3(7)(i).
  • The assessees challenged the constitutional validity of Rule 3(7)(i), contending that it was ultra vires Section 17, arbitrary, and irrational in using SBI’s PLR as a benchmark for calculating perquisite value.

Decision

  • In favour of revenue: Rule 3(7)(i) of the Income-tax Rules, 1962 is constitutional and not ultra vires Section 17 of the Income-tax Act, 1961.
  • Perquisite Nature: The benefit derived by bank employees from interest-free or concessional rate loans is a distinct advantage enjoyed by virtue of employment and falls squarely within the definition of a taxable “perquisite.”
  • Validity of Benchmark: Benchmarking the valuation of the perquisite against the Prime Lending Rate (PLR) of the State Bank of India is neither arbitrary nor irrational.
  • Constitutional Alignment: Rule 3(7)(i) applies a uniform, fair, and objective determining principle that fully aligns with constitutional values.

KeyTakeaways

  • Interest-free or concessional loans granted to employees by employers constitute a taxable perquisite under Section 17 of the Income-tax Act.
  • The statutory mechanism using SBI’s Prime Lending Rate (PLR) as a standard reference rate for calculating loan perquisite values is legally sound and non-arbitrary.
  • Rule-making authority under delegated legislation can fix a uniform commercial benchmark to ensure standardized tax computation across employees.
HIGH COURT OF MADRAS
Federal Bank Executive forum
v.
Union Bank of India
Sushrut Arvind Dharmadhikari, CJ.
and G. Arul Murugan, J.
WP No. 4775 of 2009
MP No.1 of 2009
OCTOBER  14, 2026
Dr.B. Ramaswamy, Senior Standing Counsel and R. Rajashree for the Respondent.
ORDER
G. Arul Murugan, J. – This writ petition is filed seeking a declaration to declare Rule 3(7)(i) of the Income Tax Rules and also impugned sub-para 15 of Bulletin 53/2008 issued by the 4th respondent as unconstitutional, ultra vires the Income Tax Act and, therefore, null and void.
2. The provisions of Section 17(2), 17(2)(iii), 17(2)(vi), 17(2)(viii)of the Act and Rule 3(7)(i) of the Income Tax Rules, 1962 (in short ‘the Rules’) were under challenge before this Court in separate writ petitions and a Division Bench of this Court, heard the entire batch of writ petitions analogously and by common judgment dated 20.04.2026 in the case of All India Union Bank Officers Federation v. Union of India   (Madras)/(CDJ 2016 MHC 2413), dismissed the writ petitions and upheld the constitutional validity of Section 17(2)(viii) of the Act and Rule 3(7)(i) of the Rules. The relevant portion of the judgment dated 20.04.2016 reads as under:
“49. More than helping the petitioners, the said decision helps the respondent – Department. If salary is taxable and some perquisite or benefit forms part of a package, the same should also be taxed. Therefore, we are of the considered view that the challenge to Section 17(2)(viii)
as well as Rule 3(7)(i) has to fail.
50. As a consequence, all the above writ petitions are dismissed as devoid of any merits. Consequently, all connected pending MPs are also dismissed. There will be no order as to costs.”
3. In the appeals filed against the aforesaid judgment before the Hon’ble Supreme Court, vide judgment dated 07.05.2024, in the case of All India Bank Officers’ Confederation v. Regional Manager, Central Bank of India   93 (SC)(2024 INSC 389 :: (Civil Appeal No.7708 of 2014 and batch of cases), the Hon’ble Supreme Court upheld the judgment of this Court dated 20.04.2016 and dismissed the appeals upholding the constitutional validity of Section 17(2) of the Act and Rule 3(7) of the Rules.
3.1 . The relevant portions of the Supreme Court judgment is usefully reproduced hereunder:
31. We are of the opinion that the enactment of subordinate legislation for levying tax on interest free/concessional loans as a fringe benefit is within the rule- making power under Section 17(2)(viii) of the Act. Section 17(2)(viii) itself, and the enactment of Rule 3(7)(i) is not a case of excessive delegation and falls within the parameters of permissible delegation. Section 17(2) clearly delineates the legislative policy and lays down standards for the rule-making authority. Accordingly, Rule 3(7)(i) is intra vires Section 17(2)(viii) of the Act. 26 AIR (1967) SC 1895. Section 17(2)(viii) does not lead to an excessive delegation of the ‘essential legislative function’.
II. Is Rule 3(7)(i) arbitrary and violative of Article 14 of the Constitution insofar as it treats the PLR of SBI as the benchmark?
32. Rule 3(7)(i) posits SBI’s rate of interest, that is the PLR, as the benchmark to determine the value of benefit to the assessee in comparison to the rate of interest charged by other individual banks. The fixation of SBI’s rate of interest as the benchmark is neither an arbitrary nor unequal exercise of power. The rule-making authority has not treated unequal as equals. The benefit enjoyed by bank employees from interest-free loans or loans at a concessional rate is a unique benefit/advantage enjoyed by them. It is in the nature of a ‘perquisite’, and hence is liable to taxation.
33. Rule 3(7)(i), it can be hardly argued, is arbitrary or irrational for the reason it benchmarks computation of the perquisite with reference to the SBI’s PLR. SBI is the largest bank in the country and the interest rates fixed by them invariably impact and affect the interest rates being charged by other banks. By fixing a single clear benchmark for computation of the perquisite or fringe benefit, the rule prevents ascertainment of the interest rates being charged by different banks from the customers and, thus, checks unnecessary litigation. Rule 3(7)(i) ensures consistency in application, provides clarity for both the assessee and the revenue department, and provides certainty as to the amount to be taxed. When there is certainty and clarity, there is tax efficiency which is beneficial to both the tax payer and the tax authorities. These are all hallmarks of good tax legislation. Rule 3(7)(i) is based on an uniform approach and yet premised on a fair determining principle which aligns with constitutional values.
34. It is also apposite to note that when it comes to uniform approach the laws relating to fiscal or tax measures enjoy greater latitude than other statutes. The Legislature should be allowed some flexibility in such matters and this Court would be more inclined to give judicial deference to legislative wisdom. Commercial and tax legislations tend to be highly sensitive and complex as they deal with multiple problems and are contingent. This Court would not like to interfere with the legislation in question, which prevents possibilities of abuse and promotes certainty. It is not iniquitous, draconian or harsh on the taxpayers. A complex problem has been solved through a straitjacket formula, meriting judicial acceptance. To hold otherwise, would lead to multiple problems/issues and override the legislative wisdom. The universal test in the present case is pragmatic, fair and just. Therefore, Rule 3(7) is held to be intra vires Article 14 of the Constitution of India.
35. We, accordingly, dismiss the appeals and uphold the impugned judgments of the High Courts of Madras and Madhya Pradesh. No order as to costs.”
4. In view of the fact that already the issue regarding the constitutional validity of Rule 3(7)(i) of the Rules has been considered by this Court and decided in favour of the Revenue and the said order was also upheld by the Supreme Court in the judgment referred supra, the issue raised in this writ petition is squarely covered by the aforesaid judgments of this Court and the Hon’ble Supreme Court.
In view of the above, the writ petition stands dismissed. There shall be no order as to costs. Consequently, the interim application stands closed.