Tax on Company Car and Other Perquisites

Short answer: Perquisites, or 'perks', are non-cash benefits from your employer, like a company car or accommodation. Their value, calculated as per Rule 3 of the Income Tax Rules, is added to your salary and taxed. For a company car, the taxable value depends on who owns the car, its engine capacity (CC), who pays for expenses, and whether it is used for official, personal, or mixed purposes. This amount is then reflected in your Form 16.

What are perquisites and why are they taxed?

Perquisites are benefits or amenities provided by an employer to an employee in addition to their salary. The Income-tax Act, 1961, under Section 17(2), defines them as part of the 'Salary' head of income. Because they form a part of your compensation package and have a monetary value, they are considered income and are subject to tax. Common examples include company cars, rent-free accommodation (RFA), stock options (ESOPs), and interest-free loans.

How is a company car taxed as a perquisite?

Rule 3 of the Income Tax Rules, 1962, provides specific guidelines for calculating the taxable value of a company car. The tax treatment depends on a combination of factors: whether the employer or employee owns the car, who bears the running and maintenance expenses, the car's engine size, and its purpose of use. The rules aim to assign a monetary value to the personal benefit the employee receives from using the car.

What is the tax value of a company car?

The taxable value is a fixed monthly amount that gets added to your income, not the actual cost to the company. The valuation is straightforward when a car owned or hired by the employer is used for both official and personal duties, which is the most common scenario. The value also increases if a driver is provided.

Here is a breakdown of the valuation for a car owned or hired by the employer:

Car Usage & Expenses	Engine Capacity ≤ 1.6L (1600cc)	Engine Capacity > 1.6L (1600cc)	Add for Driver
Mixed Use, Expenses paid by Employer	₹1,800 per month	₹2,400 per month	₹900 per month
Mixed Use, Expenses paid by Employee	₹600 per month	₹900 per month	₹900 per month
Official Use Only (with logbook)	Nil (Not a perquisite)	Nil (Not a perquisite)	Nil
Personal Use Only	Actual cost to employer (including maintenance & driver's salary) + 10% of car's cost for depreciation, minus any amount recovered from the employee.	Same as above.	Included in actual cost.

If the car is owned by the employee but the employer reimburses running and maintenance costs for mixed use, the taxable value is the actual amount reimbursed minus ₹1,800 (or ₹2,400 for a car > 1.6L) per month, provided a logbook is maintained.

Are there other common perquisites I should know about?

Yes, besides a company car, several other benefits are considered taxable perquisites. Understanding these is crucial for accurately assessing your total taxable income. Some of the most common perquisites include:

• Rent-Free Accommodation (RFA): The value depends on the city's population and whether the accommodation is owned by the employer or leased.
• Employee Stock Option Plans (ESOPs): The difference between the Fair Market Value (FMV) of the shares on the date of exercise and the exercise price paid by the employee is a perquisite. You can read more in our guide to ESOP taxation.
• Interest-free or Concessional Loans: If your employer provides a loan exceeding ₹20,000 at a rate lower than the State Bank of India's prime lending rate, the interest difference is a taxable perquisite.
• Gifts: Gifts received from an employer are exempt up to ₹5,000 per year. Any amount above this is fully taxable.
• Professional Tax: If the employer pays the professional tax on behalf of the employee, it is first included as a perquisite and then allowed as a deduction from gross salary.

How does the new tax regime affect perquisite taxation?

The method of calculating the value of perquisites, such as a company car, is identical under both the new and old tax regimes. However, the overall tax liability can differ significantly. The new tax regime, which is the default option from FY 2023-24, has lower tax rates but disallows most common deductions like those under Section 80C and HRA. For the financial year 2025-26, a standard deduction of ₹75,000 is available under the new regime, just like the old one. Your choice of regime will determine the final tax on your total income, which includes salary and perquisites. You can learn more about the differences in our New vs Old Tax Regime comparison.

Where can I see the value of perquisites in my salary?

You can find the taxable value of perquisites in Part B of your Form 16. Your employer is responsible for calculating this value as per the Income Tax Rules, deducting Tax at Source (TDS) on it, and reporting it in your Form 16 under the head 'Value of perquisites u/s 17(2)'. Always review this section to ensure it aligns with the benefits you have received. Our guide to Form 16 breaks this down in more detail.

Worked example

Let's consider Rohan, a sales director in Bengaluru. For the Financial Year 2025-26 (Assessment Year 2026-27), his salary details are as follows:

• Annual Salary: ₹40,00,000
• Perquisite: His employer provides a car with a 2.0-litre engine for both official and personal use. The company covers all running/maintenance costs and also provides a driver.

Here is how the taxable income is calculated under the default new tax regime:

1. Base Annual Salary: ₹40,00,000
2. Calculate Car Perquisite Value:
   • The car's engine capacity is over 1.6 litres, and expenses are met by the employer. The monthly value is ₹2,400.
   • A driver is also provided, adding ₹900 per month.
   • Total monthly perquisite value: ₹2,400 + ₹900 = ₹3,300
3. Annual Perquisite Value: ₹3,300 x 12 months = ₹39,600
4. Gross Salary: ₹40,00,000 (Base Salary) + ₹39,600 (Perquisite Value) = ₹40,39,600
5. Standard Deduction: As of FY 2025-26, a standard deduction of ₹75,000 is available under the new regime.
6. Taxable Income: ₹40,39,600 - ₹75,000 = ₹39,64,600
7. Tax Calculation (New Regime Slabs - AY 2026-27): Rohan's tax liability would be calculated on this final taxable income as per the slabs.

Common mistakes

1. Forgetting the driver: Many employees forget that if the company pays for a driver for the company car, its value (₹900/month) must also be added to the perquisite calculation.
2. Assuming 'Official Use Only' without proof: Claiming a car is for official use only, and thus not a perquisite, is not possible without a meticulously maintained logbook detailing every official trip. Tax authorities can disallow this claim without proper documentation.
3. Ignoring Form 16: Failing to cross-verify the perquisite value mentioned in your Form 16. It's your responsibility to ensure the reported income is correct when filing your return.
4. Incorrect valuation for employee-owned cars: Misunderstanding the complex rules when an employee owns the car but the employer reimburses expenses. The calculation method is entirely different in this case.

How SP & SC helps

Navigating salary structures and perquisite taxation can be complex. At SP & SC, we provide comprehensive payroll and compliance services to ensure accuracy and optimisation. We help founders design tax-efficient compensation packages, manage TDS calculations for perks like company cars and RFA, and ensure all statutory requirements are met. Our team also assists individual salaried professionals in reviewing their salary structure and tax liabilities to ensure they are compliant and tax-efficient. For more details, explore our Payroll Services.

Frequently asked questions

Q1. Is the perquisite value for an electric car different?

The Income Tax Rules do not yet specify a separate valuation for electric vehicles (EVs). In practice, most employers classify them based on motor power equivalency or simply use the rate for cars with engines over 1.6 litres (₹2,400/month) for consistency and to avoid disputes. Alternatively, the actual cost method may be used.

Q2. What if the company provides two cars?

If an employee is provided with more than one car for mixed (official and personal) use, the perquisite is calculated as follows: one car is valued as per the standard rules (e.g., ₹2,400 + ₹900 per month). The second car is valued at the actual amount spent by the employer on its running, maintenance, and driver, plus 10% of the car's cost for depreciation, treating it as if it were for purely personal use.

Q3. What records must be kept for 'official use only'?

To prove a car was used exclusively for official duties and avoid perquisite tax, the employer must maintain a detailed logbook. This log should record the date, start and end mileage, destination, and the specific official purpose of every journey. A simple declaration is not sufficient.

Q4. Can I claim car expenses as a deduction if I use my own car for work?

As a salaried individual, you cannot claim deductions for expenses incurred on your personal car, even if used for official purposes. The standard deduction of ₹75,000 (for FY 2025-26) is a flat deduction meant to cover all such employment-related expenses. Only business owners or professionals can claim vehicle expenses against their business income.

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For help with payroll compliance, designing tax-efficient salary structures, or clarifying your personal tax liabilities, our team is here to assist. Share your documents with us, and we will provide a written fixed-fee quote. Whether it's structuring a founder's salary or managing payroll for your entire team, we handle it end to end. Contact SP & SC today or message us on WhatsApp at +91 90356 74566.