Getting a company car sounds like a solid perk – no EMI stress, no insurance renewals, and sometimes even fuel and a driver are taken care of.
But from the tax department’s point of view, it’s not just a convenience; it’s income.
Any car your employer gives you, whether owned, leased, or reimbursed, is treated as a perquisite under section 17(2) of the Income Tax Act. This means its value is added to your salary and taxed at your applicable slab rate under both the old and new tax regimes.
Importantly, you’re not taxed on the car’s actual cost. Instead, the tax depends on the engine size, who pays for the fuel, and how the vehicle is used.
Let’s understand the math.
How company cars are valued?
Most company cars are used for both work and personal purposes. For this kind of mixed use, tax rules don’t look at what the car actually costs the employer. Instead, a fixed monthly amount is added to your taxable salary. This amount depends on the car’s engine capacity, whether fuel is paid by the employer, and whether a driver is provided.
Here’s how that valuation works when the car is owned or hired by the employer:
| Engine capacity | Car & fuel (paid by employer) | With driver (paid by employer) |
|---|---|---|
| Up to 1.6 litres | ₹1,800 per month | ₹2,700 per month |
| Above 1.6 litres | ₹2,400 per month | ₹3,300 per month |
If the employer provides the car but you pay for fuel and maintenance, the taxable amount drops to ₹600 (up to 1.6L) or ₹900 (above 1.6L) per month.
What if the car is used differently?
As mentioned earlier, how the car is used makes a significant difference to the amount of tax you pay.
1. For wholly official use:
If the car is used only for work, the taxable value is Nil.
However, this applies only if the employer maintains proper records, such as a logbook with dates, destinations, and mileage, and issues a certificate confirming that the car is used strictly for official purposes.
2. For wholly personal use:
If the car is used only for personal or family purposes, the tax impact is significantly higher. You are taxed on the actual cost to the employer, which includes fuel, maintenance, insurance, driver’s salary, and a 10% annual wear-and-tear charge on the car’s original cost.
3. Home-to-office commute:
Under the Income Tax Bill, 2025, expenses incurred by the employer for travel between your home and office are treated as a non-taxable perquisite, even if the vehicle is owned or hired by the employer.
To sum up, mixed use follows fixed rates, official use can be tax-free with records, and purely personal use is the most expensive from a tax perspective.
Should you consider corporate leasing?
Corporate car leasing is a common way companies provide cars to employees, especially those in higher tax brackets. In this setup, the lease rental is deducted from your gross (pre-tax) salary, which reduces your taxable income. A small fixed perquisite value is then added back under the mixed-use rules.
In many cases, the salary deduction is higher than the perquisite value added back. This means the overall tax you pay can be lower, particularly if you are in the 30% tax bracket.
The actual benefit, however, depends on the lease terms, your salary structure, and your employer’s policy.
It’s also worth noting that these car perquisite rules traditionally applied only to “specified employees” (directors or those with a high salary).
Effective April 1, 2025, the government has raised the salary threshold for specified employees from ₹50,000 to ₹4,00,000. If your salary (excluding non-monetary perks) is below this limit, these car benefits may be completely tax-free for you.
Do you have a company car? Tell us how your employer structures it!