When an employer provides a loan to an employee and charges interest, which is below the prescribed rate of interest, then the difference between the prescribed rate and employer’s loan rate is a benefit from employment and is tax chargeable on the employee.

Low interest rate employment benefit provisions will continue to apply even after the employee has left employment as long as the loan remains un-paid.

However, following amendment to the law by the 1998 Finance Act and introduction of “FRINGE BENEFIT TAX” which is payable by employers, the determination of the chargeable benefits is now in two categories i.e. loans provided on or before 11th June, 1998 and loans provided after 11th June 1998.

(i)         Low Interest Rate Benefit

Employees will continue to be taxed on low interest rate benefit in respect of loans provided by the employer on or before 11th June 1998.

The low interest benefit chargeable on the employees is calculated as the difference between interest charged to the employee and the prescribed rate of interest of 15% per cent, or such interest rate based on the Market Lending Rates prescribed by the Commission’ whichever is lower.

Example 1

–           Loan provided by employer                            –           Ksh.1,500,000

–           Employer’s Loan Interest Rate                                   –           5%

–           Prescribed Rate of Interest (given by KRA)              –           8%

Calculation of Low Interest benefit:

–           Low Interest Benefit is (8% – 5% =3%):        KShs.1, 500,000 x 3%

=          KShs.45, 000 per annum

i.e.       KShs.3,750 per month

(ii)        Fringe Benefit Tax Payable by Employer (Section 12B) Effective Date 12th June 1998

A Tax known as Fringe Benefit tax was introduced by new provisions under Section 12B of the Income Tax Act and is payable by employers commencing on the 12th June 1998 in respect of loan provided to employees, directors or their relatives at an interest rate lower than the market interest rate.  The taxable value of Fringe Benefit is determined as follows: –

In case of loans provided after 11th June, 1998 (or loan provided on or before 11th June 1998 whose terms and conditions have changed after 11th June, 1998,) the value of Fringe Benefit shall be the difference between the interest that would have been payable on the loan, if calculated at the market interest rate and the actual interest paid.


Date of advance                                              –           12th November 2006

Employer’s loan amount                                 –           KShs.2, 100,000

–           Interest charged to employee              –           5%

–           Market Interest rate for the month     –           8% [refer to market tables]

Calculation of Fringe Benefit Tax:

Fringe Benefit is (8% – 5%= 3%)                    Kshs.2, 100,000 x 3%

= Ksh. 63,000 per annum

Fringe Benefit taxable amount           i.e. KShs.5, 250 per month (for that month)

Fringe Benefit payable by employer Ksh. 5,250 x 30% = 1,575


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