A car lease in CTC helps reduce your tax outgo. Here's how

This significant flexi benefit not only offers employees the convenience of driving a car without owning it and worrying about maintenance, but it can also help save tax.

How car lease works

Car leasing allows employees to use a vehicle for a fixed period by paying a monthly rental fee instead of buying a car outright or taking a loan. Ownership remains with the leasing company and at the end of the term, one can either return the car or pay a pre-agreed amount to own it.

When this arrangement is routed through your employer, the employer signs a lease agreement with a leasing company and pays the monthly rentals directly to them. These rentals are part of the cost to company (CTC), meaning they are part of your pre-tax salary and the employer deducts it to pay it to the leasing company on your behalf.

The rental amount includes the cost of the car and insurance, and in some cases, maintenance too. If maintenance does not make up the rental amount, it can be added to the CTC as a separate flexi component on which you can claim reimbursements.

Car lease tenures are usually structured for three to five years, while some companies offer them as annually renewable contracts. Longer-tenure leases are more commonly used and are often seen as a soft retention tool, especially for mid- to senior-level employees.

Though used as a retention tool, it doesn’t tie you down to the company. If you leave the employer before the lease period ends, you can foreclose the lease by paying an early termination cost, purchase the car by paying its residual value or transfer the lease to another employee within the organisation. The option to buy the car also exists at the end of the lease tenure.

Car leasing through employers is a good option to use a car for daily use, with fewer ownership hassles. There is no need to arrange a loan, manage insurance renewals, or worry about large upfront payments. In many cases, even maintenance is bundled into the lease.

The key advantage lies in tax efficiency. When a car is leased through the employer, the cost is adjusted within your salary structure, allowing you to pay for it from pre-tax income. This is different from buying a car outright or through a loan, where repayments are made from income that has already been taxed.

Mayank Mohanka, founder, TaxAaram India, and a partner at S.M. Mohanka & Associates said any company can offer car lease components in the salary structures of their employees, based on their internal policies. “There is no specific eligibility criteria, say minimum employee count or minimum compensation, that makes companies qualified.”

Tax benefit

Car leasing through the employer is offered as a flexi component within your CTC, which is what enables the tax advantage. Instead of receiving this portion as cash in hand, the allocated amount is paid directly to the leasing company. Since this adjustment happens before tax is calculated, your taxable salary comes down. Additionally, you can also claim reimbursements for fuel, driver salary and maintenance (if not included in the lease cost).

For instance, if your monthly lease rental is ₹30,000 and you additionally claim ₹8,000 for fuel and ₹7,000 for driver salary, the total car-related component becomes ₹45,000 a month. Annually, you save tax equal to your slab rates on ₹5.4 lakh of your total CTC. Say, your annual CTC is ₹24 lakh, at 25% slab rates under the new tax regime, you save ₹1.35 lakh in taxes.

Compare this with buying a car. Assume you take a loan where your EMI is ₹30,000, and you spend another ₹15,000 monthly on fuel and driver. While you can still claim reimbursements on fuel and driver’s salary by providing invoices, the ₹30,000 EMI will be paid entirely from post-tax income. In comparison, you save only ₹45,000 in tax (25% of ₹1.8 lakh on fuel and driver’s salary).

It should be noted that reimbursements on expenses such as fuel, driver’s salary and maintenance costs are entirely tax-free if the car is used only for official purposes. If it is used for both professional and personal use, there is a perquisite tax to be paid, said chartered accountant Suresh Surana.

“These expenditures that the employer incurs are treated as a perquisite forming part of salary income. The perquisite tax is ₹5,000 plus ₹3,000 for the driver for cars with a cubic capacity of engine up to 1.6 litre or if the car is an EV (electric vehicle), whereas it is ₹7,000 plus ₹3,000 for the driver for cars with higher engine capacity,” he explained.

The perquisite tax is deducted by the employer. Mohanka said in most cases, both employers and employees prefer to treat the car as being used for mixed purposes, as it is more flexible and avoids the need to maintain detailed travel logs. “The employer then adds the fixed taxable value of the car perk to your salary for TDS calculation,” he said.

However, if you intend to use it strictly for office and related usage, you must communicate this to the employer.

The fixed perquisite value on company cars has been increased from FY27, which reduces the overall tax advantage of leasing. Earlier, the taxable value was ₹2,700 per month for cars with engine capacity up to 1.6 litre; this has now been raised to ₹8,000. For larger cars, it has gone up from ₹3,300 to ₹10,000. This higher taxable value means the net tax savings from a car lease will be lower than before.

Even with this change, car leasing remains a meaningful component under the new tax regime, where most flexi benefits have been phased out. In the above example, even if you pay tax on ₹96,000 perquisite amount, your tax saving will reduce from ₹1.35 lakh to ₹1.11 lakh.

Car lease also fits within the definition of wages under the new labour codes, unlike HRA, LTA or variable pay, which makes it easier for employers to include it as part of overall compensation.