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As you climb up the ladder in your profession, it is commonly seen that the employer provides a car to ensure easy commute for such employees. Such a car can be owned by the employer or the employee. In addition, the expenses related to the car can be sponsored by the employer or not. The car may be used for personal reasons at times, leading to confusion in the minds of employees in terms of tax liability. Here is a list of possibilities and their respective tax liabilities.

  1. Car owned by the employer – Value of car used exclusively for official purposes
  2. Car owned by the employer – Value of car used for both official and personal purposes
  3. Car owned by the employer – Value of car used only for personal purposes
  4. Car owned by the employee
  5. Illustration to show which option is beneficial for the employee
  6. What happens if the employer provides multiple cars?

1. Car owned by the employer – Value of car used exclusively for official purposes

Irrespective of who owns the car, if the car provided by the employer is used solely for official purposes, no tax liability exists. For this to be non-taxable, the employer must maintain proper records as given below:

  • Details of all the official journey 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.

  • 2. Car owned 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.

    Description

    Cubic Capacity within 1.6 litre

    Cubic Capacity exceeding 1.6 litre

    Expenses reimbursed by the employer

    Rs.1,800 + Rs.900 (if a driver is provided by the employer)

    Rs.2,400 + Rs.900 (if the driver is provided by the employer)

    Expenses directly met by the employee

    Rs.600 + Rs.900 (if the driver is provided by the employer)

    Rs.900 + Rs.900 (if the driver is provided by the employer)

    3. 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.

    4. 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:

  • Description

    Cubic Capacity within 1.6 litre

    Cubic Capacity exceeding 1.6 litre

    Expenses reimbursed by the employer

    Rs.1,800 + Rs.900 (if a driver is provided by the employer)

    Rs.2,400 + Rs.900 (if the driver is provided by the employer)

    Expenses directly met by the employee

    Rs.600 + Rs.900 (if the driver is provided by the employer)

    Rs.900 + Rs.900 (if the driver is provided by the employer)

    5. Illustration to show which option is beneficial for the employee

    Consider that Kumar Associates Ltd. has taken a car on lease and provided it to the new manager. This car is permitted by the employer to be used both for personal and official purposes. 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 value of 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 in a case where the employer provides the manager with Rs.1 lakh as reimbursement, the value of the perquisite taxable would be Rs.32,400 and Rs.39,600. The difference between the value of perquisites and the reimbursement will not be taxable for him.

    6. 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.

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