Silly question, right? You would obviously prefer the lower taxable income. That’s exactly what a car lease through your employer can do for you. And no, this is not some aggressive tax avoidance trick. This is a legitimate benefit under the Income Tax Rules. And this benefit is available under both the old and the new tax regime.

In this post, let’s look at the tax benefits of car leasing in detail.

A car lease through the employer is an arrangement where the company leases a car on your behalf and pays the monthly lease rental directly to the leasing company. The amount is deducted from your CTC. However, this amount is not treated as your taxable salary.

Effectively, the car lease payments are made from your pre-tax income.

Essentially, instead of you taking a car loan personally, your employer pays for the car payment as a pre-tax deduction. And usually, the lease payments include car rental, insurance, and maintenance.

However, there is no free lunch. As per the Income Tax rules, a small amount is added to taxable income as perquisite. But this value is much lower than the actual rental lease you pay. And this gap is where the tax saving comes from.

From your perspective, the lower perquisite, better it is for you.

The value of perquisite depends on the following factors.

1. Who owns the car? Employer or employee. For this post, let’s consider employer owned cars only.
2. Who bears the running and maintenance expenses? Employer or employee. If the employee bears the expenses, then the perquisite value will be lower and rightly so.
3. Engine Capacity of the car:  <=1.6 litres or > 1.6 litres. Lower engine capacity means lower perquisite value.
4. Whether chauffeur is provided by the employer? If the employer provides chauffeur, then the perquisite value goes up.
5. How is the car used? Official or personal or mixed use. If the usage is exclusively official, then there is no perquisite. If the car is for personal use, the entire lease amount is considered with provision for minor deductions. If there is mixed use, the Income Tax Act specifies crisp values. For this post, let’s consider mixed use only.

Let’s take a simple scenario. You earn Rs 25 lacs per annum. Your employer leases a car for Rs 30,000 per month. Running all the scenarios below for engine capacity, expenses borne by employer or employee, and chauffeur provided or not.

As you see, there are significant savings under each scenario.

Well, the tax benefits are fine, but you do not own the car at the end of lease term. Had you taken a car loan, you would have owned the car at the end of the lease term.

There are a few points to consider.

1. If you had bought the car on loan, then the loan EMI payments would have come from your post-tax salary.
2. In case of car lease, the effective payment for using the car is Monthly Lease Payment – Monthly tax savings. Hence, if the monthly lease payment is Rs 30,000 and the tax savings are Rs 7,000 per month, your net monthly outgo is Rs 23,000 per month.
3. With a car lease, you do not have to spend anything on car insurance and maintenance. However, a car lease may have certain usage on distance restrictions. Say, you cannot drive for more than 5,000 kms in a year.
4. Usually, at the end of the lease term, you have the option (not compulsion) to buy the car at about 10-20% of the original price. However, please review the car lease terms before making this call. There may be some complications if you leave the job before completion of your lease.

Let’s understand this with a simple example (ignoring savings on insurance and maintenance):

• Car cost: Rs 14.12 lacs
• Loan EMI: Rs 30,000 (5 years at 10%)
• Lease rental: Rs 30,000

Assumptions:

• No chauffeur
• Employee bears expenses
• Engine ≤1.6L

At the end of 5 years, assume you can buy the car at 20% of its original price: Rs 2.82 lacs.

You save Rs 88,600 each over the next 5 years. This takes your savings to about Rs 4.43 lacs.

This is significantly higher than what you will need to pay to acquire the car on lease expiry.

Every lease contract is different and certain clauses, especially around exit, can make things complicated. However, if your marginal income tax rate is 30% or above, numbers will likely be in favour of car lease.

Do consider the convenience factor. No down payment. No car loan EMI from your personal account. Insurance, maintenance, road tax, all handled by the leasing company.  However, there is a minor flip side. Your take-home salary drops because the lease rental is carved out of your CTC. But you had to own a car, you would still likely be better off than with a car loan.

Note that, if your employer does not offer this facility, you cannot claim this benefit on your own. It must be routed through the employer.

If your employer offers a Flexible Benefit Plan with a car lease option, run the numbers for your specific salary. The tax saving is real, but it depends on your CTC, the lease rental, and the car you choose. For someone in the 30% tax bracket or higher, this almost always makes sense over a car loan on a spreadsheet. Also, consider contingent costs of lease (early exit through resignation or retrenchment, option to purchase car on lease expiry) and decide.

Have you taken a car on lease through your employer? What has been your experience? Let us know in the comments.