The avenues to save tax narrow for salaried employees when their pay goes up. For people in the highest tax bracket of 30%, salary increases leave comparatively less money in their hands due to tax liability. In these circumstances, salaried employees should explore all possible ways to save taxes. One way to drive down the income tax liability is company car lease finance.
How does a car lease finance option help salaried employees save income tax?
Many companies give employees the flexibility to change the salary structure to optimise tax savings. Employees who have this option and fall in the highest income tax bracket can explore getting a car on a company lease, instead of an auto loan, to save tax.
“Generally, in the case of salaried employees, their employer might provide a car option. In many cases, this will be a lease model — wherein the employer would take the car on lease and provide it to the employee. Every month, the employer will recover the lease rentals from the employee,” says Sudhakar Sethuraman, Partner, Deloitte Touche Tohmatsu India.
If you use this option, the lease rental amount can significantly reduce your tax income. “In case an employee opts to lease a car through their employer, wherein the employer directly pays the car lease rentals to the leasing company, such rental payments would form a part of the CTC of the employee. However, as such rental payments are directly paid by the employer to the leasing company, the same would not be taxable in the hands of the employee. Thus, the employees would be able to save the tax on the lease rental component,” says Suresh Surana, Founder, RSM India.
When you compare it to a car loan EMI, your monthly outgo on a lease rental would be much lower. “Car leasing offers employees a lower net monthly EMI because they only pay for the depreciation value and not the total cost of the vehicle,” says Krishnendu Chatterjee, Vice-President and Business Head, TeamLease Services (Staffing).
The higher the tax bracket your income falls into, the higher will be your net income tax saving. “As the lease payment is deducted from the employee’s salary before taxes, he or she can save up to 30% in taxes,” says Chatterjee.
Will it be considered as perquisite, requiring employee to pay tax?
In most cases, companies not only pay the car lease rental but also an additional amount for upkeep and maintenance of the vehicle. However, the entire amount is not tax free; the employee would have to pay income tax on the notional amount considered under perquisite.
“Generally, as part of the company’s motor car policy, the employer would provide the following as a part of the employees’ salary package — reimbursement of fuel and maintenance expenses, driver salary and ancillary expenses related to running and maintenance of the car. Such expenses qualify as perquisite under the Income-tax Act, 1961, whereby only notional taxable value of motor car up to Rs 39,600 per year is taxable in the hands of the employees,” says Sethuraman.
The notional taxable value is based on the cubic capacity of the car and driver’s salary reimbursement, provided the car is used for both official and personal purposes.
|Particulars||Cubic capacity of motor car engine < 1.6 litre||Cubic capacity of motor car engine > 1.6 litre|
|Where motor vehicle is owned/hired by the employer, running & maintenance expenses are reimbursed by employer and car is used for both official and personal purposes||Rs 1,800 per month + Rs 900 if driver is provided, which is Rs 32,400 per annum||Rs 2,400 per month + Rs 900 if driver is provided, which is Rs 39,600 per annum|
How notional taxable value is calculated for the employer leased car
So your net income tax saving would be calculated after deducting the notional perquisite from the total reimbursement amount received. “On an assumption that an employee receives a reimbursement of Rs 300,000 per annum towards running and maintaining a motor car, and the employee’s average rate of tax is 30%, the employee would save taxes up to Rs 78,120 [(Rs 3,00,000 – Rs 39,600) * 30%] on an annual basis during the car lease period,” says Sethuraman.
Car leasing option can save more tax than auto loan income tax deduction
When compared to an auto loan, a company leased car works out to be a far better deal. “Contrary to auto loans with substantial down payments, leasing is a more affordable option,” says Chatterjee.
More tax efficient than auto loan with Rs 1.5 lakh deduction for electric car
|Particulars||Car on company lease (Rs)||Car purchase with loan (Rs)|
|Less: Standard deduction||-50,000||-50,000|
|Less: Section 80C||-1,50,000||-1,50,000|
|Less: Motor car reimbursement if part of CTC (car lease payments: lease rental 50,000 per month * 12 months)||-6,00,000|
|Add: Notional value of perquisite||+39,600|
|Less: Deduction w.r.t. car loan||-1,50,000|
|(assuming eligible for deduction u/s 80EEB for purchase of electric car)|
|Net total income||2,239,600||28,00,000|
|Tax liability (@30%)||4,84,380||6,07,500|
|Saving in tax||1,23,120|
|Car on lease has engine > 1.6 litres; computation under old tax regime; considering no other deduction than standard deduction and Section 80C|
Who is eligible to save tax under car lease finance option?
Saving tax through the car lease finance option may not be available to every employee. The foremost criteria is that the car should be owned or hired by the employer. “The eligibility criteria as defined under the Income-tax Act, 1961, is that the motor car should be owned or hired by the employer, expenses should be reimbursed by the employer and the motor car should be used for both official and personal usage,” says Sethuraman.
The income tax provision is particular about the usage: the tax benefit may not be available in case the car is used only for personal purposes. “It may be noted that there will be no tax benefit if the car is used only for personal purposes. Further, tax benefits will be restricted if the car is not owned or hired by the employer,” says Sethuraman.
Not all companies offer this option, so you will need to check with your employer first. Even the ones that offer it may do it in a different form. “The eligibility criteria for employees to use car leasing at an organisation may vary depending on the policies and the employee hierarchy in the organisation,” says Chatterjee.
Many companies offer this option to only select employees who get a CTC above a particular threshold. “The general eligibility criteria depends on the CTC framework of companies and also their respective car leasing policy. Also, it is pertinent to analyse the terms of agreement for such car lease options in order to determine the tax implications,” says Surana.
All risks related to car is transferred to the employer
This option mostly works in finance of a new car. “Generally, the car would be registered in the name of the employer — risk and rewards incidental to the ownership of the car would be transferred to the employer. At the end of a specified period, say 3 or 4 years, the employer provides for transfer of the car to the employee on the payment of a certain amount by the employee,” says Surana.
What happens to the tax benefit if an employee joins another company job in the middle of a lease?
One of the eventualities you must figure out before using this option is what will happen if you plan to change your job. You have to be financially prepared to handle this situation. “It is generally observed that companies do provide the option of owning the car after expiry if the employee and the car lease vendor directly manage this aspect. In addition, some companies provide the option of transferring the lease to the new employer in the event the employee joins another organisation during the lease tenure,” says Sethuraman.
Will an employee get the option to own the car after expiry of lease?
The lease finance option can, on expiry, offer an employee the option to get a new car or get the ownership of the used car for a payment. “The industry at large practices leasing of new cars as against leasing a second-hand or old car. The option of owning the car after the expiry of the leasing tenure depends on various factors — whether the lease is an operating or finance lease, whether the intention of the employer and employee is to only lease a car and not own it, etc,” says Sethuraman.
If you want ownership of the car after lease expiry, you should go for a finance lease. “In one of the types of leases known as finance leases, the leasing company, the employer, and the employee enter into a tri-party agreement. The employer is the lessee of the car, and the employee is its co-lessee. The employee’s name is on the car’s registration, and when the lease is up, the employee takes ownership of the car,” says Chatterjee.
However, an operating lease can give you a bigger tax saving benefit. “Another type of lease is an operating lease, in which the car is listed in the name of the leasing company. When the lease ends, the employee may either switch to a new car or pay the residual value and buy the car. In the operation lease, employees get the benefits of fuel charges and driver’s salary reimbursement, which do not attract direct taxes,” says Chatterjee.
How does this work if the employee already owns a car?
Many companies offer the reimbursement facility even when an employee owns a car. “Where the car is owned by the employee, the employee can reduce their taxable income up to Rs 39,600 per annum provided the car’s running and maintenance expenses are reimbursed by the employer and the car is used for both official and personal purposes of the employee,” says Sethuraman.
Know the risks involved and precautions you must take
While this option may give a good tax saving, it is advisable to thoroughly understand its terms and conditions. “Generally, a car leasing option is beneficial to the employees. However, an individual should evaluate the lease programme. For example, whether it offers flexibility for buying and closure in the event of a change in employer, the outflows involved and the documentation required to have a peaceful ride,” says Sethuraman.
While the tax saving potential is available in a company leased car, you should go for it only when you actually need a car. “Employees should thoroughly review the terms of such leasing for any restrictions based on the usage of the car, as such charges may add on to the cost of the employee and have an impact on their personal budget, their ownership of other cars, etc,” adds Surana.