Company cars and vehicle benefits in India
Reviewed by Mellow Editorial Team, HR & payroll content team
Company car benefits in India are treated as a taxable perquisite in the hands of the employee, with the taxable value calculated using prescribed rates set by the Income Tax Act — not the actual cost of the car or fuel. Employers must include this value in the employee's salary for TDS purposes and report it correctly in Form 16 and Form 24Q.
What counts as a vehicle benefit
A company car benefit arises when an employer provides a motor vehicle (owned or leased by the company) for an employee's use, or reimburses fuel and driver costs. The benefit can take several forms:
- A company-owned or leased car made available to the employee
- Fuel reimbursements paid by the employer
- A driver provided at the employer's cost
- Car loan interest subsidised by the employer
Each of these is treated differently under the perquisite rules. The critical question is whether the car is used wholly for official duties, partly for official duties, or entirely for personal use.
How the taxable value is calculated
This is where most employers make errors. The taxable perquisite is not the market value of the car or the actual running costs — it is calculated using fixed prescribed rates defined under the Income Tax Rules.
Car used partly for official and partly for personal purposes (most common situation):
The taxable value depends on two things: who owns the car (employer or employee) and the engine capacity.
For a car owned or hired by the employer and used partly for personal purposes, a fixed amount per month is added to the employee's taxable salary. This amount varies based on whether the engine capacity is above or below 1.6 litres. An additional fixed monthly amount is added if the employer also provides a driver.
The actual fuel bills and maintenance costs paid by the employer are largely irrelevant to this calculation — the prescribed monthly rates are what matter.
Car used exclusively for official duties:
If the car is used only for official purposes, it is not a taxable perquisite at all. However, the employer must maintain complete records: a logbook signed by a senior official, trip details, purpose of each journey. Without this documentation, the exemption will not hold up in a tax assessment.
Car used exclusively for personal purposes:
The full actual cost (including driver, fuel, maintenance, depreciation on the vehicle) becomes taxable in the employee's hands.
The employer's TDS obligation
Because a company car is a perquisite, its value forms part of the employee's gross salary for TDS calculation purposes. Here is what that means operationally:
1. Each month, the HR or payroll team must add the prescribed perquisite value to the employee's taxable salary.
2. TDS is calculated on this augmented salary figure and deducted from the employee's cash pay.
3. The perquisite value is reported in the salary details submitted in Form 24Q each quarter.
4. At year end, the perquisite is reflected in Part B of Form 16 issued to the employee.
Under the current regime for 2026/27, the employee pays income tax on this perquisite at their applicable slab rate — up to 30% — plus the 4% health and education cess. The section 87A rebate applies only if total income after deductions falls within the rebate threshold, which is unlikely for employees receiving company car benefits alongside a meaningful salary.
GST and corporate accounting considerations
From the employer's side, GST input tax credit on motor vehicles is restricted under the GST Act. Businesses generally cannot claim input tax credit on cars purchased for general use — the credit is available only in specific circumstances, such as when the vehicle is used for further supply of vehicles, for transportation of passengers as a taxable service, or for certain other defined purposes.
This means the cost of company cars often lands fully on the company's books without offset, making it worth evaluating the total cost of ownership against alternatives like a car allowance in salary or a lease arrangement.
Practical steps for HR and payroll teams
- Classify each vehicle arrangement at the start of the financial year: official only, mixed use, or personal use.
- Obtain the engine capacity in writing from the procurement or finance team so you apply the correct prescribed rate.
- If claiming the official-use exemption, set up a logbook process before the employee starts using the vehicle — retrospective records are rarely accepted.
- Update your payroll software or salary working sheet to add the monthly perquisite value automatically so it is never missed in a TDS cycle.
- Review arrangements when an employee changes role, receives a new vehicle, or when the company switches from ownership to lease, since each change can alter the taxable treatment.
India's four consolidated Labour Codes, in force from 2025, have restructured the definition of wages in ways that affect PF and other statutory calculations. A car allowance included in the salary structure may affect what counts as basic wages under the Code on Wages, so it is worth reviewing how vehicle-related pay components sit within the broader salary architecture.
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