Leasing Company Car and Tax Implications for a Salaried Employee
If you are a salaried employee working in an MNC or in a private limited company, this might be worth reading for you. MNC’s often offer several perks to their employees and one of them is motor car expense. Leasing company car is more tax efficient than owning a car for salaried employees. Leasing a car differs from a commercial hire purchase, under which the interest and depreciation is tax deductable.
Normally, we have seen a lot of salaried employees having several queries about the tax liability of owing a car and using it for both personal and office use. If the car is owned by the employee of the company and the petrol and maintenance expenses are reimbursed by the employer, the value of perquisite needs to be calculated as per the case.
There are three cases to be discussed for different tax implications depending upon the car used for personal or official purposes for a salaried employee:
Case 1 – If the Car is Used for Personal Use Only
The taxable perquisite in this case where car is used for personal use will be the amount actually paid by employer to the employee. This amount will be added in your taxable salary. The computation of total tax amount will be done as per the existing tax rate slabs.
The table given below shows the current income tax rate slabs for financial year 2012-13 for males and females. In the recent budget presented on March 15, income tax rate slabs have been kept same for both men and women. The current income tax rate slabs are as follows:
|Income Tax Slab (in Rs)||Tax Rate|
|0 to 2,00,000||No tax|
|2,00,001 to 5,00,000||10%|
|5,00,001 to 10,00,000||20%|
Case 2 – If the Car is Used for Official Use Only
As the car is solely used for official purposes, there is no addition to your taxable income and the value of perquisite will be nil. Although it becomes necessary for the employer of the company to maintain certain records. The employer must maintain proper records of his official visits, their date, distance of journey, billing documents, places visited
Case 3 – If the Car is Partly Used for Private and Partly for Official Purposes
The computation of tax implications will be as follows:
- Actual amount incurred by the employer
- Deduct a amount of Rs 2,400 from the above figure for a car above 1.6 litres OR a amount of Rs 1,800 for a car below 1.6 litres
In this case also, an employer is needed to maintain the official records of date of visit, places visited, petrol consumed and other billing documents which is necessary to confirm that the bills are authentic and the expenses were incurred for official purposes
Dilemma: Mr. Suresh working with TCS, Pune got a pay hike and the employer offered with a car lease option. He was confused about the tax implications of the same and unable to decide whether to buy a new car or accept company offer
Solution: In such a case, where company provides you with a motor car lease option, one must accept the car lease option rather than buying your own as it would be much more tax efficient option. In such a case, the EMI paid by your company for which you are working would be deducted from your taxable income as per calculated according to Income Tax rules and thus reduce your tax liability.
Conclusion – Leasing Company Car and its Tax Implications
Leasing company car is recommended rather than buying or owning it for tax efficiency, if the car is partly used for official purposes and partly for personal use which is the most probable case. We recommend that you ask your employer and get car lease from the employer for tax optimization.
It’s worth taking advice on the full tax implications of offering company cars and whether to lease or buy – the rules become stricter year-on-year to encourage businesses and individuals to buy and drive more environmentally-friendly cars.