Car lease and driver salary components may be include in an employee’s compensation package as part of structured benefits offered by employers. These components fall under the category of perquisites under the , 1961 and are subject to specific valuation rules for the purpose of taxation.
“Drivers and cars in a compensation package are both considered perks. With respect to taxation, they are both considered salary but are not taxed like normal salary,” said Siddharth Maurya, Founder & Managing Director of Vibhavangal Anukulakara Private Limited.
Taxpayers must also note that the inclusion of these components in salary packages requires appropriate reporting and compliance in line with guidelines set by the Income Tax Department.
How are these components taxed?
The Income Tax Rules provide a way for companies to value these perks, so companies end up paying based on the notional value instead of what the company actually pays. “A company that provides a car and a driver for work and personal use ends up including only a specific value based on engine size and a use factor for that car,” Maurya said.
He further noted that if the employer provides a driver, they must also consider a specific value for the driver. “However, if the car is used only for company purposes and if the company provides the proper records, the valuation for the tax would be zero, and the company would be better off because the tax on the car would effectively be zero,” Maurya explained.
To illustrate the calculation, Maurya explained a scenario in which an employee is provided a driver and a car as a part of his or her compensation. If it is assumed that an employer pays ₹30,000 a month for a car and ₹15,000 a month for a driver, the gross employer expenditure would amount to ₹45,000 a month.
Instead of adding the total to the employee’s taxable income, the tax regulations may value a car at approximately ₹5,000 a month, and a driver at approximately ₹3,000 a month, Maurya noted, stating that with this scenario, the employee’s taxable income is ₹8,000 a month or ₹96,000 in a year.
For an employee in the 30% tax bracket, the tax payable would be approximately ₹28,800 in a year, he said. “This scenario is more beneficial than paying the driver and providing the car, amounting to a gross expenditure of ₹45,000, and subjecting the employee to a tax liability of ₹5.4 lakh a year.”
Who can benefit the most from this perk?
The key draw of a corporate car lease is , especially for those in higher tax brackets, as employees are taxed only on a portion of the car’s cost funded by the employer. The total tax savings can range from ₹80,000 to ₹1.5 lakh, depending on the total cost of the car, whether or not a driver and car maintenance are included, and the employee’s tax bracket, according to Maurya.
“The main benefit is through thethat come from being able to convert a cash component of the salary to a perquisite which has a lower and predetermined tax value,” he said.
Primarily, car lease benefit provides a tax efficient salary structure. However, employees should also consider, especially if they plan to change employment mid-lease, car leases as a function of the lease, the company policies surrounding the lease, and the duration of the lease “When structured correctly, car leases provide tax savings for the employee,” he said.