Car expenses paid by employer to employee is taxable

Income tax liability on the employee’s car expenses are derived based on the purpose and ownership of the car. Followings are the provisions of income tax to calculate taxable amount of perquisite in the hands of employee.

Car is owned by the employee and expenses are met by employer

Where the car is owned by the employee and expenses are met by employer, we have to see whether the expenses are for official purpose or not. If it is incurred for the purpose of office then entire amount will not be taxable.

If the entire expenses are for personal use of the employee then the whole expenses will be treated as perquisite and taxable in the hands of employee.

In the above case, if expenses are partly incurred for business and partly for official then perquisite as calculated below will be taxable in the hands of employee;

Perquisite = Actual expenditure incurred by employer – Rs. 1, 800 per month (where cubic capacity of engine is up to 1.6 liters) or Rs. 2, 400 per month (where cubic capacity of engine is above 1.6 liters) – Rs. 900 per month as driver salary 

Car is owned by the employer and expenses are incurred by the employee

If car is owned by the employer and expenses are incurred by employee then income tax will be derived based on the official expenditure of the employee.

If the car is used wholly for personal purpose then wear and tear of it (i.e. 10% per annum of the actual cost of the motor car) and driver salary will be treated as perquisite and taxable in the hand of employee. If such car is taken by the employer on hire and hire charges are paid by the employer then such hire charges and driver salary if any will be treated as perquisite.

In the above case if such expenses are partly used for private purpose and partly for official then following amount will be treated as perquisite and will be taxable in the hand of employee.

Perquisite = Rs. 600 per month (where cubic capacity of the engine is up to 1.6 liters) or Rs. 900 per month (where cubic capacity of the engine is above 1.6 liters) + driver salary of Rs. 900 per month

Car is owned by the employer and expenses are also incurred by the employer

Where the it is in personal use, running and maintenance expenses + wear and tear (i.e. 10% per annum of the actual cost of motor car) + driver’s salary – amount charged from employee will be your taxable perquisite.

If such car provided to the employee has been hired by the employer then hire charges will also be included in calculation of perquisite of the employee.

If the car is partly in personal use and partly in official use then following amount will be taxable as perquisite

Perquisite = Rs. 1800 (where cubic capacity of the engine is up to 1.6 liters) or Rs. 2400 (where cubic capacity of the engine is above 1.6 liters) + Driver’s salary of Rs. 900

If the employer has provided more than one car to employee then one car will be valued as per the above provisions and all other one will be treated as if they are used wholly and exclusively for private purpose.

Not taxable perquisite

• Where the it is owned by the employee and expenses incurred by him are not reimbursed by employer then such expenses are not taxable.
• Car is owned by the employer and used for official purpose.
• Car is owned by the employee and used for official purpose.

Additional Conditions to be fulfilled

Where the car is owned by the employer or employee and the employer claims that such car is used wholly for official purpose then noting will be taxable in the hands of employee if the employer maintain following records;

• Complete details of journey which include date of journey, destination, mileage and the amount of expenditure; and

• The employer needs to give a certificate to the employee by stating that all the expenses are incurred wholly and exclusively for the performance of official duties.

If the employer claims that the actual expenses on the running and maintenance of the motor car or any other conveyance owned by the employee are for official purpose is more than the amount specified above as deductible then such higher amount can be deducted if the employer maintain such details of the journey as mentioned above. And the employer has to issue a certificate to employee stating that the expenses are incurred wholly and exclusively for the performance of official duties.

Other relevant points

• Instead of car if any other vehicle are provided by the employer to the employee and such vehicle is used for personal use then running and maintenance expenses incurred will be treated as perquisite and taxable in the hands of employee.

In the above case if such expenses are partly used for personal and partly for official then perquisite will be the actual expenses incurred by the employer as reduced by an amount of Rs. 900 per month.