Tax Benefits On A Car Provided By The Employer

Car facilities provided to the employee is considered as a perquisite, thereby a part of the salary income. Though it i considered as a taxable salary income, taxes can be saved in car perquisite. The following article explains in detail, the valuation of car perquisite and tax benefits that can be derived out of the provisions of the Income Tax Act.

Car Owned by the Employer – Value of Car used Exclusively for Official Purposes

If the car facility is to the employer for official purposes, it is not treated as a perquisite and is not taxable in the hands of the employee. The employer must maintain proper records as given below:

• Details of all the official journeys must be maintained including details such as date, destination, mileage, bills, and other expenditures related to it.
• The employer must also issue a certificate stating that the vehicle was used only for official purposes.

Car Owned or Hired by the Employer – Value of Car used for both Official and Personal Purposes

When the car provided by the employer is used for personal purposes in addition to official ones, the expenditure will be considered under Rule 3(2)(A) and Table II of Value of Perquisites. The table below provides further information on the same.

Car Owned by the Employer – Value of Car used only for Personal Purposes

If the car provided by the employer is solely used for personal reasons and if the expenditure is borne by the employer completely, the entire amount will be taxable. No benefit can be availed by the employee in this regard. The amount reimbursed will be mentioned in the payslip and can be taxed according to the applicable income tax slab. Any amount recovered by the employer from the employee will be reduced in computing the taxable amount.

Car Owned by the Employee

In a case where the car is owned by the employee and running and maintenance expenses are met or reimbursed by the employer:

• Car is used wholly for official purposes, the value of the car would be similar to the point (1) above.
• Car is used for personal purposes in addition to official ones;, the expenditure incurred as reduced by below will be taxable:

Tax Planning Strategy with Example 

As a method of tax planning, employees typically look into HRA exemption, Section 80C, and Section 80D to reduce their tax liability. Now, because of the new regime, such deduction also lost its shine. Now, you can leverage this provision to reduce their tax liability when purchasing a car. This option can be exercised irrespective of the tax regime that you choose.

Employers provide FBP -  A flexible benefit plan where employees can structure their salary component. Such an employee desiring to purchase the car can now contact his employer to get such a car on lease. i.e. instead of the employee paying the lease for such purchase, the Employer will bear such cost and charge it against the employee's salary. Now, how will this help employees save tax liability, Here is an example

Consider that Mr W, who is an employee of Kumar Associates Ltd., has taken a car on lease and provided it to the new manager, Mr W. This car is permitted by the employer to be used both for personal and official purposes.

Such a car comes with a monthly leacse payment of Rs 50,000, and terms are set in such a way that after the lease term of 4 years, such Car will be transferred to Mr W at notional value (Since the car is fully depreciated).

Now, Income tax computation will be as follows when you restructure the salary component.

Because of the above restructuring of the salary, you will observe that the tax liability of  the employee will be reduced by nearly Rs 2 lakhs every year for the next 4 years.

If the employer does not provide a driver for this car. Let us say that the car’s cubic capacity is above 1.6 litres. In this case, the perquisites will be Rs.2,400 per month, i.e. Rs.28,800 per annum. Rs.900 is not included here as the employer has not provided a driver for the car as per the statement above. 

Even if the employer provides the manager with Rs.1 lakh as reimbursement, the value of the perquisite taxable would be Rs.39,600. The difference between the value of perquisites and the reimbursement will not be taxable for him.

What Happens if the Employer Provides Multiple Cars?

If your employer provides one car for your use and another car for your family member’s use, the benefits from the value of perquisites will be applicable to only one car. The other car will be considered solely for personal purposes and will not be eligible for any tax benefits.

Related Articles:

1. Deductions available for salaried individuals 
2. Salary Income
3. Standard Deduction for Salaried Individuals