Company offers car expenses reimbursement to its employees if these expenses are incurred for official duties. Car allowance income tax liability when owned by the employee is based on the purpose of use: private, official or both. Following points will help us understand taxability of car expenses when the employee owns the car and the expenses are reimbursed or borne by the employer.
If vehicle expenses are reimbursed or borne by the employer and the vehicle is used solely for official purpose then such reimbursements will not be taxable. Following conditions must satisfy to claim these expenses:
- Employer should maintain proper records of journey, mileage, destination and the amount of expenditure
- Employer gives a certificate that the expenses reimbursed are wholly and exclusively for official use
If the car is used wholly for private purpose then entire reimbursements paid are taxable.
However, if the car is used for both private and official purpose, then the taxable amount is calculated on the basis of the following formula:
- Total amount spent or reimbursed by the employer
- Less: Amount used for official purpose that is specified by Income Tax Act on the basis of cubic capacity*
- Less: Any amount recovered from employee
- Balance amount, if positive, is taxable to the employee
* Value used for the official purpose is calculated on the basis of the cubic capacity of a car.
- If the cubic capacity of the car is below 1.6 liters i.e. 1600CC, expenses for use of the car are considered at the rate of Rs. 1,800/- p.m.
- If the cubic capacity of the car is above 1.6 liters i.e. 1600CC, expenses for use of the car are considered at the rate of Rs. 2,400/- p.m.
If chauffeur is provided by the employer then the expenses claimed are restricted to Rs. 900/- p.m. Higher sum is permissible if transaction details like bank statements, payment vouchers etc. are available with the employer.