Income Tax Benefits of Leasing a Car in India
A car may be provided by the employer for the employee to ensure travelling is easy. The car may be owned by the employee or the employer. In certain cases, the employer may pay for any car expenses. Under such circumstances, tax benefits can be claimed in case there is a deduction in the salary if lease rental is included.
What is a Car Lease?
If an individual uses a car for a certain period and regular rentals are paid it is called a car lease. The individual does not own the car and the vehicle must be returned once the lease ends.
Maintenance costs need not be paid if you lease a car. No down payment needs to be paid as well. A fixed amount must be paid every month. The instalment that is paid includes ongoing expenses, maintenance, insurance, and vehicle cost.
What is the Purpose of a Salary-Linked Corporate Car Leasing Policy to Benefit Employees?
The employer will the lease rental every month from the employee’s salary. The amount is deducted from the salary before taxes. The car can be chosen by the employee. However, there must be a partnership between the firm that leases the car and the employer.
Car Owned or Hired by the Employer – Value of Car used for both Personal and Official Purposes
If you use the car that the employer provides for both official and personal purposes, Rule 3(2)(A) will be considered. The details are mentioned in the table below:
Details | Cubic Capacity is above 1.6 litre | Cubic Capacity of up to 1.6 litre |
Employee’s Expenses | Rs.900 + Rs.900 (if employer provides the driver) every month | Rs.600 + Rs.900 (if employer provides the driver) every month |
Amount Employer Reimburses | Rs.2,400 + Rs.900 (if employer provides the driver) every month | Rs.1,800 + Rs.900 (if employer provides the driver) every month |
Employer Owns the Car – Value of Car for Personal Purposes
Taxes must be paid in case the car is only used for personal purposes and the employer bears all expenses. The amount that will be reimbursed will be available on the salary slip and taxes must be paid as per the tax slab.
Car Owned by Employee
If the employee owns the car and maintenance and running costs are handled by the employer:
In case the car is used for official and personal purposes, the taxable amount is mentioned in the table below:
Details | Cubic Capacity is above 1.6 litre | Cubic Capacity of up to 1.6 litre |
Employee’s Expenses | Rs.900 + Rs.900 (if employer provides the driver) every month | Rs.600 + Rs.900 (if employer provides the driver) every month |
Amount Employer Reimburses | Rs.2,400 + Rs.900 (if employer provides the driver) every month | Rs.1,800 + Rs.900 (if employer provides the driver) every month |
Features and Benefits of Leasing a Car
The main features and benefits of leasing a car are mentioned below:
- Tax Benefits: Up to 30% can be saved on taxes in case of car lease. The option is available for self-employed individuals and salaried employees.
- Comprehensive Insurance: Insurance is usually included in the instalment that is paid when you lease a car. Therefore, you need not worry about renewing the insurance every year.
- Hassle-Free Experience: The terms and conditions are transparent. The lessor handles maintenance costs.
- New Cars can be Used: Well-maintained and new cars are offered by the lessor. This is a good option for individuals who wish to drive new cars.
- No Down Payment: No down payment will need to be paid unlike a car loan. Once the initial instalment is paid, you can start using the car.
- Maintenance Benefits: You can save on any additional expenses as all maintenance costs are paid by the lessor.
Tax Planning Strategy with Example
In case an individual opts for car lease for both official and personal purposes, the amount of tax that must be paid is mentioned in the table below:
Assumptions:
- Monthly Lease Payment: Rs.50,000
- Duration: 4 years
Particular | With Car Lease | Without Car Lease |
CTC | Rs.50 lakh | Rs.50 lakh |
HRA | Rs.11 lakh | Rs.12.50 lakh |
Basic Salary | Rs.22 lakh | Rs.25 lakh |
Other Allowances | Rs.11 lakh | Rs.12.50 lakh |
Payment for Car Lease | Rs.6 lakh (Rs.50,000 per month) | - |
Gross Salary | Rs.44 lakh | Rs.50 lakh |
Car Perquisites | Rs.28,800 | - |
Head Salary Income | Rs.44,28,800 | Rs.50 lakh |
Tax to be Paid | Rs.10,54,186 | Rs.12,32,400 |
Conclusion
There are various benefits when you lease a car. However, it is important that you read the terms and conditions thoroughly before leasing the car. Depending on the engine capacity of the car, the amount of tax that needs to be paid will vary.
FAQs on Income Tax Benefits of Leasing a Car in India
- How can taxes be claimed if the employer provides multiple cars?
Depending on the value of the perquisites, benefits can be claimed for one car. The second car will be considered for personal purposes only.
- Can car lease tax benefits be claimed under the new tax regime?
Yes, car lease tax benefits can be claimed under the new tax regime.
- Will TDS need to be paid in case of car lease?
Yes, TDS will need to be paid under Section 194C of the Income Tax Act.
- During the lease term, who owns the car?
The car may be owned by the lessor or the employer during the lease term. However, employees can purchase the car once the lease term is completed.
- In case the car is used only for personal purposes, can tax benefits be claimed?
No tax benefits can be claimed if the car is used for personal purposes only.
- Is car lease part of the employee’s taxable salary?
No, car lease is not part of the employee’s taxable salary as the leasing company is paid the amount by the employer.
- Will GST be applicable on the total value of the car lease?
Yes, GST will be applicable on the total value of the car lease.
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