Save Income Tax with car lease finance as part of salary

With an increase in salary, salaried employees' tax-saving options become more limited. Salaries that grow leave a person in the highest tax bracket (30%) with relatively less money in their hands because of their tax obligations. Salaried workers in these situations ought to look into every avenue for tax savings. Company car lease financing is one technique to reduce the income tax liability.

Many companies give employees the flexibility to change the salary structure to optimise tax savings. Employees who have this option and fall in the highest income tax bracket can explore getting a car on a company lease, instead of an auto loan, to save tax.

“Generally, in the case of salaried employees, their employer might provide a car option. In many cases, this will be a lease model — wherein the employer would take the car on lease and provide it to the employee. Every month, the employer will recover the lease rentals from the employee,”

On the basis of who undertakes the ownership of the car between the leasing company and the employee, car leases are of two types

Operating lease

Under this, the car is registered in the name of the leasing company and at the end of the leasing period, the employee can either upgrade to a new vehicle or buy it after paying the residual value.

It is considered beneficial from the point of view of companies as they don’t have to worry about the car being on their books. However, from the point of view of an employee, it may not be beneficial because one needs to pay the residual value of the car, which can be quite high under this option, at the end of the leasing tenure.

Finance lease

under this , the leasing company, the employer, and the employee enter into a tri-party agreement. The employer is the lessee of the car and the employee its co-lessee. The car is registered in the employee’s name, and at the end of the lease period, the ownership is transferred to the employee. This finance lease option is beneficial for the employee as the residual value is usually in the range of 5-10%. However, the leasing rentals in this option are high.

While the finance lease option is considered to be more favorable for employees, it is the operating leases that is preferred currently. One of the major reasons for this paradox is that finance leases are available only to top paid executives at a company as they command a big monthly lease rental, and so the total number of employees eligible for this option are small.

How does a car lease finance option help salaried employees save income tax?

If you use this option, the lease rental amount can significantly reduce your tax income. “In case an employee opts to lease a car through their employer, wherein the employer directly pays the car lease rentals to the leasing company, such rental payments would form a part of the CTC of the employee. However, as such rental payments are directly paid by the employer to the leasing company, the same would not be taxable in the hands of the employee. Thus, the employees would be able to save the the tax on the lease rental component.

The higher the tax bracket your income falls into, the higher will be your net income tax saving. “As the lease payment is deducted from the employee’s salary before taxes, he or she can save up to 30% in taxes,”

Will it be considered as perquisite, requiring employee to pay tax?

In most cases, companies not only pay the car lease rental but also an additional amount for upkeep and maintenance of the vehicle. However, the entire amount is not tax free; the employee would have to pay income tax on the notional amount considered under perquisite.

“Generally, as part of the company’s motor car policy, the employer would provide the following as a part of the employees’ salary package.

reimbursement of fuel and maintenance expenses, driver salary and ancillary expenses related to running and maintenance of the car. Such expenses qualify as perquisite under the Income-tax Act, 1961, whereby only notional taxable value of motor car up to Rs 39,600 per year (Rs 2,400 per month + Rs 900 if driver is provided) is taxable in the hands of the employees.

Example 

Who is eligible to save tax under car lease finance option?

Saving tax through the car lease finance option may not be available to every employee. Many companies offer this option to only select employees who get a CTC above a particular threshold. The general eligibility criteria depends on the CTC framework of companies and also their respective car leasing policy.