For salaried individuals in India, especially those in higher income brackets, rising salaries can sometimes feel like a double-edged sword. As your income increases, so does your tax liability, leaving you with a smaller percentage of your earnings to take home. Navigating the landscape of tax-saving options becomes crucial. One increasingly popular and effective method to reduce your income tax burden is through company car lease finance programs, such as the Deloitte car lease program in India.
This guide delves into how a car lease program offered by your employer, particularly one like Deloitte’s, can be a strategic tool for tax optimization. We’ll explore the mechanics of car leasing, compare it to traditional auto loans, and clarify the tax implications, ensuring you have a comprehensive understanding to make informed financial decisions.
Understanding Car Lease Finance for Tax Savings
Many forward-thinking companies in India empower their employees to restructure their salary components to maximize tax efficiency. For employees in the highest tax brackets, opting for a company car lease instead of a personal auto loan can unlock significant tax savings.
According to Sudhakar Sethuraman, Partner at Deloitte Touche Tohmatsu India, “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.”
Alt text: Image of Donald Trump and Narendra Modi shaking hands, representing business and leadership, relevant to discussion of company programs like Deloitte car lease program India.
This arrangement allows the lease rental amount to be deducted from your pre-tax salary, effectively reducing your taxable income. Suresh Surana, Founder of RSM India, explains, “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 tax on the lease rental component.”
Lease vs. Loan: The Financial Advantage
When you compare a car lease to a traditional car loan with Equated Monthly Installments (EMIs), the financial benefits of leasing become apparent. Krishnendu Chatterjee, Vice-President and Business Head at TeamLease Services (Staffing), highlights, “Car leasing offers employees a lower net monthly EMI because they only pay for the depreciation value and not the total cost of the vehicle.”
This means your monthly outflow is significantly lower with a lease, as you are essentially paying for the vehicle’s depreciation during the lease period, rather than the entire principal amount as in a loan. The higher your income tax bracket, the more substantial your tax savings will be. Chatterjee further emphasizes, “As the lease payment is deducted from the employee’s salary before taxes, he or she can save up to 30% in taxes.”
Perquisite Tax: Understanding the Notional Value
While the lease rental component offers tax savings, it’s important to understand the concept of “perquisite” in company car leases. Often, companies not only cover lease rentals but also provide reimbursements for vehicle upkeep and maintenance. However, the entire amount isn’t tax-exempt. A notional value is assigned as a perquisite, on which the employee is liable to pay tax.
Sethuraman clarifies, “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 is taxable in the hands of the employees.”
This notional taxable value is calculated based on the engine’s cubic capacity and whether a driver’s salary is reimbursed, assuming the car is used for both official and personal purposes. The table below illustrates this:
| Particulars | Cubic capacity of motor car engine ≤ 1.6 litre | Cubic capacity of motor car engine > 1.6 litre |
|---|---|---|
| Where motor vehicle is owned/hired by the employer, running & maintenance expenses are reimbursed by employer and car is used for both official and personal purposes | Rs 1,800 per month + Rs 900 if driver is provided, which is Rs 32,400 per annum | Rs 2,400 per month + Rs 900 if driver is provided, which is Rs 39,600 per annum |
Calculating Your Net Tax Savings
To determine your actual tax savings, you need to deduct this notional perquisite value from the total reimbursement amount and then calculate the tax benefit on the remaining amount.
Sethuraman illustrates with an example: “On an assumption that an employee receives a reimbursement of Rs 300,000 per annum towards running and maintaining a motor car, and the employee’s average rate of tax is 30%, the employee would save taxes up to Rs 78,120 [(Rs 3,00,000 – Rs 39,600) * 30%] on an annual basis during the car lease period.”
Even after considering the perquisite tax, the net tax saving from a company car lease can be substantial.
Car Lease: A More Tax-Efficient Choice Than Auto Loans
Compared to traditional auto loans, a company-leased car often emerges as a more financially advantageous option for tax saving. Chatterjee points out, “Contrary to auto loans with substantial down payments, leasing is a more affordable option.”
Furthermore, when compared to the income tax deductions available on auto loans, even those for electric vehicles, car leasing can offer greater tax efficiency. Consider the following comparison:
| Particulars | Car on company lease (Rs) | Car purchase with loan (Rs) |
|---|---|---|
| Salary | 30,00,000 | 30,00,000 |
| Gross salary | ||
| Less: Standard deduction | -50,000 | -50,000 |
| Less: Section 80C | -1,50,000 | -1,50,000 |
| Less: Motor car reimbursement if part of CTC (car lease payments: lease rental 50,000 per month * 12 months) | -6,00,000 | |
| Add: Notional value of perquisite | +39,600 | |
| Less: Deduction w.r.t. car loan (assuming eligible for deduction u/s 80EEB for purchase of electric car) | -1,50,000 | |
| Net total income | 2,239,600 | 28,00,000 |
| Tax liability (@30%) | 4,84,380 | 6,07,500 |
| Saving in tax | 1,23,120 |
Note: Car on lease has engine > 1.6 litres; computation under old tax regime; considering no other deduction than standard deduction and Section 80C
This example clearly illustrates the significant tax savings potential of a company car lease compared to purchasing a car with a loan, even when considering deductions for electric car loans.
Eligibility and Company Policies
It’s crucial to understand that not every employee is eligible for tax savings through a car lease program. The primary condition, as per the Income-tax Act, 1961, is that “the motor car should be owned or hired by the employer, expenses should be reimbursed by the employer, and the motor car should be used for both official and personal usage,” according to Sethuraman.
Alt text: A modern car key in a hand, symbolizing car ownership and leasing, relevant to understanding eligibility for car lease programs like Deloitte car lease program India.
The usage aspect is critical; tax benefits are not applicable if the car is solely for personal use. Sethuraman emphasizes, “It may be noted that there will be no tax benefit if the car is used only for personal purposes. Further, tax benefits will be restricted if the car is not owned or hired by the employer.”
Furthermore, company policies vary. Not all organizations offer car lease programs, and even those that do may have specific eligibility criteria based on employee hierarchy or CTC thresholds. Chatterjee notes, “The eligibility criteria for employees to use car leasing at an organisation may vary depending on the policies and the employee hierarchy in the organisation.”
Surana adds, “The general eligibility criteria depends on the CTC framework of companies and also their respective car leasing policy. Also, it is pertinent to analyse the terms of agreement for such car lease options in order to determine the tax implications.” Therefore, it’s essential to check with your HR department to understand your company’s specific car lease policy and eligibility requirements, especially if you are interested in programs like the Deloitte Car Lease Program India.
Risk Transfer and Ownership
In most company car lease arrangements, especially for new cars, the vehicle is registered in the employer’s name. Surana explains, “Generally, the car would be registered in the name of the employer — risk and rewards incidental to the ownership of the car would be transferred to the employer. At the end of a specified period, say 3 or 4 years, the employer provides for transfer of the car to the employee on the payment of a certain amount by the employee.” This means the employer bears the risks and rewards associated with car ownership during the lease period.
Job Changes and Lease Transfers
A common concern is what happens to the tax benefit if an employee changes jobs mid-lease. It’s crucial to consider this scenario beforehand. Sethuraman suggests, “It is generally observed that companies do provide the option of owning the car after expiry if the employee and the car lease vendor directly manage this aspect. In addition, some companies provide the option of transferring the lease to the new employer in the event the employee joins another organisation during the lease tenure.” Therefore, inquire about your company’s policy on lease transferability or early closure options.
Lease End Options: Ownership or Upgrade
Upon lease expiry, employees usually have options. Sethuraman explains, “The option of owning the car after the expiry of the leasing tenure depends on various factors — whether the lease is an operating or finance lease, whether the intention of the employer and employee is to only lease a car and not own it, etc.”
Finance leases often allow employees to take ownership at lease end, while operating leases may offer the option to switch to a new car or purchase the existing car at its residual value. Operating leases can sometimes provide greater tax benefits due to fuel and driver reimbursements being tax-exempt.
Car Lease for Existing Car Owners
Even if you already own a car, some companies offer reimbursement facilities for car-related expenses. Sethuraman mentions, “Where the car is owned by the employee, the employee can reduce their taxable income up to Rs 39,600 per annum provided the car’s running and maintenance expenses are reimbursed by the employer and the car is used for both official and personal purposes of the employee.” This can still provide a limited tax benefit even without a full car lease program.
Precautions and Considerations
While car lease programs offer attractive tax advantages, it’s essential to understand the terms and conditions thoroughly. Sethuraman advises, “Generally, a car leasing option is beneficial to the employees. However, an individual should evaluate the lease programme. For example, whether it offers flexibility for buying and closure in the event of a change in employer, the outflows involved and the documentation required to have a peaceful ride.”
Surana adds a word of caution, “Employees should thoroughly review the terms of such leasing for any restrictions based on the usage of the car, as such charges may add on to the cost of the employee and have an impact on their personal budget, their ownership of other cars, etc.”
Before opting for a car lease program, especially programs like the Deloitte car lease program India, carefully evaluate your needs, financial situation, and the specific terms of the lease agreement to ensure it aligns with your overall financial goals and provides genuine benefits. Consulting with a financial advisor can also provide personalized guidance.
