As professionals climb the corporate ladder, employers often extend the perk of providing company cars to facilitate easier commuting for their valued employees. However, the nuances of tax implications can lead to confusion, especially when the car serves both professional and personal purposes. Understanding the tax liabilities associated with employer-provided cars is crucial for employees looking to maximize their tax savings.
Let's delve into the possibilities and their respective tax implications.
When the employer-owned car is used exclusively for official purposes, it becomes a tax-free benefit. To ensure this, the employer must maintain meticulous records, including details of official journeys—dates, destinations, mileage, bills, and related expenditures. Additionally, the employer should issue a certificate confirming the vehicle's sole use for official purposes.
If the employer-provided car is used for both official and personal purposes, the expenditure is considered under Rule 3(2)(A) and Table II of the Value of Perquisites. This entails a tax liability based on the value assigned to the personal use of the car. Employees should be aware of these rules to accurately calculate their taxable income.
In the scenario where the employer-owned car is exclusively used for personal reasons, and the employer bears all associated expenses, the entire amount becomes taxable. Employees receive no benefit in this case, and the reimbursed amount is mentioned in the payslip, subject to taxation according to the applicable income tax slab. Any amount recovered by the employer from the employee is subtracted when computing the taxable amount.
In cases where the employee owns the car, and the employer covers running and maintenance expenses: If the car is used entirely for official purposes, the valuation is similar to the first scenario (employer-owned car for official use). If the car is used for both personal and official purposes, the taxable amount is the incurred expenditure reduced by certain parameters.
If an employer provides more than one car—for the employee and a family member—the benefits from the value of perquisites apply to only one car. The other car is considered solely for personal use and is ineligible for any tax benefits.
Example: “Consider that Kumar Associates 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 liters. 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,” says an expert from Clear, a fintech company.
“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,” adds Clear expert.
Navigating the tax implications of employer-sponsored car leases requires a keen understanding of the usage patterns and related rules. Employees should keep detailed records and stay informed about the specific tax implications to optimize their tax savings while enjoying the convenience of a company-provided car. Consulting with a tax professional can provide personalized guidance based on individual circumstances, ensuring compliance with tax regulations and maximizing available benefits.