Many salaried employees often struggle to find ways to reduce their taxes or claim deductions against their salary income. However, one of the lesser-known ways is to opt for a car lease policy with your employer which can save you significant amount of tax.
To understand car leasing policy and how it works, we’ll first have to know what leasing means.
A lease is a legal agreement between two parties, where one party (the lessee) gets the right to use an asset—like a car, property, or equipment—owned by another party (the lessor) for a specified period in exchange for regular payments, usually called lease rent.
In simple terms, it’s like renting something for a fixed time and fee. Once the lease period ends, the asset usually goes back to the lessor unless there’s an option to renew or buy it.
How does car leasing work for employees?
A car lease policy is a benefit provided by employers that allows employees to lease a vehicle, usually for personal and work-related use, through the company. So, instead of buying the car outright, you pay a fixed monthly amount (lease rental), which is then deducted from your salary. There are three parties involved here.
- Employee: The individual who uses the car and enters into the lease agreement.
- Employer: Who offers the lease policy and deducts the rental amount from your salary.
- Leasing Company: The bank or financial institution that provides the lease and finances your purchase.
To facilitate this, a special allowance component is added to your CTC to cover the lease rental for the car. Additionally, any expenses you incur related to the car—such as fuel, maintenance, and insurance—can be claimed as deductions. However, the total deductions cannot exceed the actual amount of the special allowance component.
Now, if you’re thinking of going the car lease route, there are a few things to keep in mind.
- It’s important to check your company’s policy, like what car-related expenses they allow and you’ll also have to keep the proof of these expenses.
- The lease term has a set duration and you need to sign an agreement with the leasing company.
- All payments should be made digitally or through the bank—cash payments won’t be accepted while claiming tax benefits.
Tax benefits of car leasing for employees
As mentioned earlier, any expenses you incur related to the car including lease rent, fuel, maintenance, and insurance can be claimed as a deduction. This will help decrease your net taxable salary and eventually, you’ll have to pay lower taxes.
Let me break it down with an example:
Here’s a basic structure of how your salary (CTC) would look:
Now, let’s compare the tax calculation if you opt for the car lease policy vs if you don’t:
Therefore, you save ₹1,09,200 in taxes when you opt for the car lease policy.
What happens after the lease tenure ends?
At the end of the lease tenure, you could have the following options:
- Buy the car from the leasing company by paying a pre-decided amount or,
- Return the car to the employer.
In case you want to exit the car lease policy before the tenure ends, you would have to pay foreclosure charges as mentioned in the agreement.