How to claim tax benefits on car provided by your employer

It is a common practice in MNCs and private limited companies to provide cars to their employees for discharging official duties. Above a pay-scale or grade of the employee, many companies provide a car to the employee.

The government had come out with a 4-month long Income Disclosure Scheme, which closed on September 30, 2016. (Reuters)

It is a common practice in MNCs and private limited companies to provide cars to their employees for discharging official duties. Above a pay-scale or grade of the employee, many companies provide a car to the employee.

These cars are taken on lease by the company and used by the employee both for official as well as personal purposes. Employees are often confused about the taxability/ tax benefits of owning a car Vs. leasing a car from their company.

The taxable amount of salary can be reduced if the company provides the car rather than employee owning the car.

(A.)Car Owned by the employer
Let’s us explain the rules, prescribed by the Income Tax Act, for use of motor car owned by the employer:

Value of motor car where it is used wholly & exclusively for official purposes

Irrespective the car is owned by employee or employer, if the car is used only for business in the performance of office duties, then it will not be taxable. The condition for taking this tax benefit is that the employer will have to maintain the required documents & detailed records as below:

* Complete details of journey undertaken for official purpose is being maintained by employer such as date, destination, mileage,bills and expenditure incurred for such journey; and
* Further, employer has to issue a certificate confirming that the car was used only for official purposes.

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Value of Motor car per Calendar Month where it is used both for officially & personal purpose (As per rule 3(2)(A) and Table II for Value of perquisite)

Sl.

No.

Circumstances

Where cubic capacity of engine does not exceed 1.6 litres(small cars)

Where cubic capacity of engine exceeds 1.6 litres

(Sedan, SUVs & Luxury Cars)

(1)

(2)

(3)

(4)

i.)

is used partly in the performance of duties and partly for private or personal purposes of his own or any member of his household, the expenses are reimbursed by employer

Rs. 1,800 (plus Rs. 900, if driver is also provided)

by the employer to run the motor car)

Rs. 2,400 (plus Rs.900, if driver is also provided to run the motor car)

(ii.)

is used partly in the performance of duties and partly for private or personal purposes of his own or any member of his household, the expenses are met directly by the employee himself

Rs.600 (plus Rs. 900, if driver is also provided

Rs.900 (plus Rs. 900, if driver is also provided)

Value of Motor car per Calendar Month where it is used only for personal purpose
In case the car is used only for personal purposes, then the whole amount, i.e. the actual expenditure incurred or reimbursed by the employer on running & maintenance of motor car, shall become taxable & no benefit would then be available to the employee.
The amount of reimbursement will be included in the salary income and taxed at applicable income tax slab rates.

(B.) Car owned by the employee
In case the car is owned by the employee and is used partly for personal & official use, then the

Value of motor car would be same as shown in point no. (i.) of the table above. Additional benefit in case the expenditure is met directly by the employee is not available (point no. (ii.).

Example explaining which option is beneficial to employee?

Situation A : When car is owned by the employer

Cars are leased by A Ltd. and provided to the employees. Fuel expenses and driver’s salary is reimbursed to the employees.
As per the Car Policy of A Ltd:

* Car is owned / taken on lease by A Ltd.
* A Ltd. provides car to employees of Manager Grade and above.
* Car is used partly for official & personal purposes.
* The fuel charges reimbursed by A Ltd. i.e. the employer is for running the car and driver is also provided by A Ltd. to the employee.
* As per the table above, where driver is not provided by the employer, the value of perquisite to be considered would be Rs.1,800 p.m. + Rs. 900 p.m. (where cc engine does not exceed 1.6 litres) or Rs.2,400 p.m.+ Rs.900 p.m.(where cc engine exceeds 1.6 litres)
* Employer incurred/ reimbursed the employee Rs. 1,00,000 during the year on the car. Therefore, in the above case only Rs.32,400/ 39,600 will be taxable as salary during the year. Balance amount would not be taxable in the hands of the employee.

Situation B : When car is owned by the employee
* Employees who own car & uses the his own car for official purposes, who are eligible for company car would opt for cash in lieu of car.
* Further the employees are entitled for reimbursement of fuel expenses and drivers’ salary as per the limits stipulated in the company car policy. The specified limits for reimbursements are as under:

Grade

Cash through salary (per month)

Reimbursement of fuel (per month)

Reimbursement of driver’s salary (per month)

Manager and above

42,700

12,000

10,000

Senior Manager

58,000

20,000

12,000

* Employees use the car for official as well as personal purpose.
* In the car policy, the limit specified for reimbursements of expenses is subject to the actual amount incurred. Say, for eg. if the actual expenditure of fuel or drivers’ salary is less than the specified limits, then the employer will reimburse the actual expenses. The actual expenditure is substantiated by bills / invoices etc. In the event the actual fuel expenses or drivers’ salary is equal or exceeds the limit specified for reimbursement, then the specified amount (per company’s car policy) would be reimbursed.
* The value of perquisite/ taxable salary will be the actual amount of expenditure incurred by the employer as reduced by the amount specified in (1)(i) of Table above. Thus in the situation, where the actual expenses are equal or exceed the specified limits, the amount specified in the car policy would be reimbursed by the employer. In such cases, the value of perquisites would be worked out as under :

Grade

Value of perquisite p.m. (where cc engine does not exceed 1.6 l) (Total reimb = fuel + drivers’ sal) in Rs,

Value of perquisite p.m (where cc engine exceeds 1.6 l) in Rs.

Manager

(22,000 –  2,700) = 19,300

(22,000 –  3,300) = 18,700

Senior Manager

(32,000 – 2,700) = 29,300

(32,000 – 3,300) = 28,700

* The cash, in lieu of car, paid to the employee is taxable as salary in the hands of the employee, i.e. Rs.42,700+Rs.19,300/ Rs.42,700+Rs.18,700 for Grade Manager as can be seen in the example.

What If employer has provided you more than one car?
In case the employer provides one car for your use and another car for one or more of your family members, then the value of one car would be taken as per the table above and another car/ cars would be treated as personal in nature & would not be eligible for any tax benefits.

Therefore, when the employer provides the car taxable perquisite is only limited to the specified limits. Hence, we recommend that you should ask your employer for car lease in order to take the benefits & save taxes.
(The author is CEO & Founder, ClearTax.in)

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