Income tax benefit of taking car lease policy provided by emoployer

[Sparsh wadhwa]

Car lease policy

When an employer talks about your salary, they mean your basic starting salary. Various components are then added to this number to create your final ‘salary package’.

These are additional benefits or incentives – like house rent allowance, telephone reimbursements, car allowance and bonuses.

When you think of these benefits prudently, you’ll notice that they make up a considerable amount of your income before tax. And some of these benefits, like a car allowance, can help you reduce your tax liability significantly.

If the lease rental of the car is part of your salary package, it means the lease amount would be reduced from your salary before taxes are paid, thereby reducing your taxable income and giving you a considerable tax advantage as compared to someone who hasn’t opted for this benefit.

Even when it comes to car maintenance, there are specific allowances made that can help you reduce your tax burden.

What is a salary linked corporate car leasing policy?

Car leasing is a preferred vehicle ownership model where an employee can opt for a car and have monthly lease rental directly paid from their pre-tax salary by their employer. For this, the enterprise will first need to tie up with the car leasing company, undergoing an onboarding process which involves a credit check, after which the company would need to draft and roll out a company car lease policy for its employees. 

How do employees benefit from a corporate car lease policy? 

1. No Down Payment Needed

The car you obtain is financed by a leasing company. So, as a lessee, you do not need to pay any down payment amount while making the purchase. This makes the leasing company the primary owner of the vehicle. So, how does this work in your favour? Well, all car-related expenditure, such as accessories, on-road price, and insurance, is included in the lease cost, which is paid for by the leasing company.

2. Maintenance Benefits

All vehicles are subject to wear and tear. With time, their maintenance and repair costs rise.

When a leasing company leases a vehicle, there are two kind of arrangements, with maintenance covered called as wet leasing and without maintenance called as dry leasing. Under wet leasing arrangement, the leasing company  takes care of maintenance expenses. And as the lessee, you need not bear these expenses.

3. Hassle-Free Car Replacement

With a car lease or an auto lease, you can replace or upgrade your vehicles at the time of lease renewal. And when you replace and upgrade your vehicles, you provide your employees with better comfort and greater safety.

And that’s not all. Easy car replacement is also beneficial in light of the vehicle scrappage policy and the green tax.

• According to the vehicle scrappage policy, all commercial and private vehicles that have been used for 15 years or more must go through a mandatory fitness check. If they fail the fitness check, they will be scrapped.
• If the vehicle is less than 15 years old but has been used for at least eight years, the government will charge a 10% to 25% ‘green tax’ and renew the fitness certificate.

These two policies can make vehicle ownership a hassle for companies. Either your vehicle will get scrapped, or you will have to pay the green tax. But car leasing saves you the trouble!

4. Tax Savings

Leasing a car can help you save up to 30% of your vehicle-related expenses from getting taxed. The employee using the car must show that they have been regularly using the vehicle for company-related purposes. They can enjoy tax benefits on the lease amount, fuel costs reimbursement, and the driver’s salary.

5. Simpler Approval Than Auto Loans

Car loan approvals can take several days. But you can get your car lease approved within 24 hours – all without the need for cumbersome paperwork!

6. Insurance Coverage

When you lease a car, the instalments you pay towards the lease cover insurance charges. This insurance coverage includes repair and maintenance costs, theft, and accidents. What’s more, the lessee does not need to worry about insurance renewal.

“In cases where a company car is given to the employee as part of his CTC, it’s not only the lease rental which is pre-tax but also other expenses related to maintenance, driver expense, and fuel allowances can be a part of the pre-tax component”

To illustrate an example,

let's assume your salary package is Rs. 25,00,000.

Out of this, Rs. 4,80,000 is your car lease amount, and another Rs. 39600 is allocated towards car maintenance, insurance, fuel and driver allowance.

This means, Rs. 5,19,600 will be deducted from your taxable income, and you will be liable to pay tax on Rs. 20,59,600 only.

In this way you can save tax of more than Rs.1.6 lakh on over 5.2 lakh of income.

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The Author is an Income tax, Accounting and GST Practitioner and can be contacted at 9024915488.